In the first quarterly Inflation Report for the year, the Bank of England outlined the ongoing weakness in the United Kingdom's economy due to ongoing debt crisis in the euro area and weakness in major export markets. The domestic recovery and spending remains confined with tight credit and fiscal conditions and all factors alongside easing impact of temporary factors on inflation the BoE sees the likelihood for headline inflation to undershoot the 2.0% target and to fall sharply at the beginning of 2012.
On the financial and credit markets the BoE sees eases strain somewhat on immediate funding challenges for European banks after the ECB's three-year loan program and the widening of the pool of collateral. For the United Kingdom bank funding markets improved somewhat and equity prices reversed most of the falls seen in the summer of 2011 nut the cost of credit still increased to households and businesses as broad money and credit growth remains weak.
For growth the bank sees the outlook unusually uncertain and expect GDP growth to remain weak in the near term before gradually strengthening as real incomes recover, though the external environment, tight credit conditions and continuing fiscal consolidation are likely to act as brakes on growth.
As for the outlook for inflation, uncertainty is also part of the picture as the pace of moderation remains uncertain. The BoE sees that Inflation is likely to decline sharply in the near term, as the impact of past increases in VAT and petrol prices drop out of the twelve-month comparison. Thereafter, inflation is likely to fall further, as upward pressures from external costs diminish and spare capacity continues to weigh on wages and prices. Nevertheless, the bank also keeps in mind that it is difficult to gauge with precision the underlying inflationary pressures which is due to the various effects that are temporarily raising inflation.
The collective judgment from the committee sees that it is more likely for inflation to undershoot the target over the forecast period, and by the end of the period those risks are judged to be broadly balance.