The Bank of England released the quarterly inflation report on November 16, explaining the latest projections and the Bank's outlook for inflation and growth in the United Kingdom, where this report follows the inflation letter sent yesterday by Mervyn King to Osborne explaining the reasons behind inflation being excessively high compared to the Bank's target.
According to the inflation report, the Bank's outlook for growth has worsened, while global demand slowed, adding to concerns that euro-area nations are unable to control the huge debt they handle and the debt crisis is spreading into larger economies within the zone, increasing the volatility and tensions in the market and adding more strains on banking and funding markets.
These factors are weighing on individuals income and prevent spending levels from improving, which is likely to pressure U.K. growth further in the short-term, despite the continued stimulus, which should support the pace of recovery to gain momentum.
The Bank explained in the report that the European debt crisis has affected U.K. growth significantly in the past period, where implementing the measures and plans approved earlier could support uncertainty to ease and in result support U.K. growth; however, lack of actions from European leaders and lawmakers could pressure U.K growth further to the downside.
On inflation, the Bank saw that inflation climbed above 5% as expected and reached 5.2% in September; however, inflationary threats are driven by temporal factors, including the increase in VAT, energy and import prices, which are likely to drop significantly in 2012 reflecting less inflation.
On the other hand, inflation will surely ease in the coming period; yet how much and how fast remains highly uncertain; however, inflation is projected to undershoot the 2% target rather than lingering above it, taking into consideration the interest rate and the stimulus are unchanged.