UK-Economy
UK inflation is likely to remain above 3 per cent for most of the next year even if interest rates remain at 5 per cent, according to the Bank of England.
Its latest quarterly Inflation Report showed the UK economy is set for a sharper, more prolonged slowdown in growth than it thought likely in February.
The bank's governor Mervyn King said the outlook has "deteriorated markedly." Inflation will return to the target and growth will eventually recover to a sustainable rate, "but we will have to be patient," he said.
His warning comes after government figures on Tuesday showed that the rate of consumer inflation reached its highest level in 13 months driven by high food and fuel costs.
King said inflation would probably stay above the government target of 2 per cent for two years, hampering the economy. House prices were set to fall further, though no one could be certain how far they would decline, he also said.
He blamed external factors, such as high food and fuel prices, and problems in the global financial markets and the subsequent credit crunch, for having a noticeable impact on the country's economy.
"We are travelling along a bumpy road as the economy rebalances.
Monetary policy cannot and should not try to prevent that adjustment," the governor said.
He suggested the UK economy would eventually absorb the problems and bounce back, help by a weaker pound and easier access to financing in the global financial markets.
But the slowdown in the economy would reflect a squeeze in real incomes, before credit conditions began to ease and the depreciation of sterling started to boost exports and reduce imports.
Speaking about the problems in the global financial markets, King said that financial organisations and banks were in the process of rethinking how they operate.
"In some ways we're only beginning to see the difficulties that have faced banks feed through now to conditions in the credit markets for companies and for households," he said.
King also said it will take time to rebuild that sense of confidence in the banking system and during that period credit "conditions will be more difficult than they would normally be." 2220**345**1771
