Bank of England released the first inflation report in 2011, which showed the bank's pessimistic outlook for inflation levels over the near-term, where the bank expects inflation to range between 4% and 5%, while remaining well above 2.0 percent in the upcoming two years.
Inflation is currently at 4.0 percent, which is higher than the bank's desired rate of 2.0 percent and the government upper-limit of 3.0 percent. Causes of elevated inflation come due to the decline in output and rising commodity prices, especially energy.
Output was affected by bad weather conditions that weighed on economic conditions at the end of 2010, meanwhile, expansionary monetary policy, along with global growth and increasing demand and the past depreciation of the sterling should ensure the return of inflation below the desired rates and recovery to be maintained in UK.
Conversely, fiscal consolidation continues to suffocate household spending, accordingly, acting as a breaker for recovery. The recent increase in VAT rates affected inflation outlook, further ahead, if spare capacity persist, inflation would return to the desired rates But both the timing and extent of that decline in inflation are uncertain, the bank said.
Under the current market assumption, if interest rates move in line with those assumption and APF program remains at £200.0 billion, chances of inflation being either above or below the target in the medium term are judged to be broadly balanced.
As for growth, the bank previously estimated growth to have fallen 0.50 percent during the fourth-quarter of 2010, according to the preliminary GDP report, due to heavy snow, output is broadly flat, but growth in 2011 first quarter is likely to receive a boost on rebounding activities.
The Inflation Report said abstracting from the effects of snow, growth around the turn of the year appears likely to be somewhat weaker than expected in the November Report.
Overall, the outlook for growth remains highly uncertain, with private and domestic demand to grow rapidly.