As surely expected, the Bank of England's Quarterly Inflation Report for May revealed the heightened risk over the policy horizon from growing fiscal imbalances across Europe and the United Kingdom.
The huge debt burden and record budged deficit is now an added uncertainty to the economic outlook for the UK according to the BoE. The inflation report highlighted the ongoing downside risk of the huge deficit burden on the economy, and now the strain of balance sheet repair is not the only downside pressure on growth as the government measures to tackle the deficit are a new strain, especially as the new government is going to enhance the Treasury's presented budget in March with new proposed measures to cut spending and narrow the deficit.
King urged Cameron's new sitting government to provide more details and balance the risk of the high deficit amid the ability to continue sustained economic development.
On growth the uncertainty is increasing over the horizon, though the BoE still see ongoing economic rebound and recovery. Their central projections are for GDP to grow around 3.5% annual rate in two years.
As for the dreaded fear of below range inflation, and deflationary pressure, the BoE were surprised of the upside resilience of inflation, though still see that the outlook remains to the downside with rising spare capacity in the economy.
The temporary factor affecting inflation which are the VAT reversal, Sterling's depreciation in trade weighted terms, and the rise in energy prices, are pressuring the short term spike in inflation to linger now at 3.4%. The risk to inflationary outlook remains to the downside still according to the BoE.
King moved markets further by hinting available options for the BoE to expand its APF program further, which is the remaining buffer for the BoE amid fragile global market conditions and growing fears over fiscal imbalances and the measures that might be adopted by the new government which might affect the pace of the recovery negatively.
Interest rates are expected to remain on their historic low according to the report and no move is to be expected before the end of the year. Where the BoE expects rates to average 1.7% by the end of the coming year and to linger near their lows this year.