Bank of England says economic outlook still uncertain
The Bank of England has warned that the outlook for the UK economy remains uncertain.
Governor Mervyn King said the recovery was likely to continue, but its strength depended heavily on developments in the world economy.
The Bank's quarterly inflation report said rising raw material prices, energy bills and next year's VAT rise meant inflation would remain high next year.
But it is expected to fall below the Bank's 2% target in two years' time.
Adding to the uncertainty are government cuts which could trigger a slowdown in construction, Mr King said, which has been a key driver in recent faster-than-expected economic growth.
The most recent gross domestic product (GDP) figures showed growth of 0.8% in the third quarter of this year. In the three months before that, the economy grew by 1.2%.
Speaking to reporters, Mr King said a sharp slowdown, however, was unlikely.
Charts in the extensive report show the Bank believes there remains only a very small possibility of the economy beginning to shrink again.
Commenting on the report, the Institute of Directors agreed the economic outlook was currently almost impossible to read.
"Uncertainty is written all over this report, and rightly so," said chief economist Graeme Leach.
"There are so many competing forces towards sustained recovery or recession, the economic models are overwhelmed."
Mr King said that as government spending was set to grow more slowly, the strength of the recovery depended "heavily" on developments in the rest of the world.
Consequently, he had a warning for the G20 countries, who are preparing for this weekend's meeting in South Korea.
"The biggest... risk we face is from bad news from the world economy and in particular the euro area.
"The world economy is facing difficult and dangerous times. I hope the G20 meeting this weekend will have a cooperative message rather than those we've been getting in the last few months and weeks," Mr King said.
There has been concern recently that some economic policies and proposals from some major economies have been designed to benefit them at the expense of others.
"If we fail to recognise that there is a genuine collective interest," he said, "then it will be lose-lose and every country will be worse off."
He said the alternative was to return to protectionism, which would be damaging for all.
The Bank's report also noted there was a wider-than-usual range of views among Monetary Policy Committee (MPC) members.
Recent meetings have seen growing disagreement between the Bank's MPC members with a three-way split in the vote at the end of the MPC's last meeting.
Seven of its members voted for no change to interest rates and no additional stimulus spending, one person wanted to see rates rise, while another member voted to see QE restart.
Mervyn King said this meant the MPC was operating as it should be.
As a cricket fan, he compared the readiness of his committee to the approach of the England team.
"Like the English batsmen preparing to defend the Ashes, watching carefully, perfectly balanced in the crease, ready to play forward or back according to the length of the incoming delivery... the MPC will watch the incoming data carefully, ready to adjust policy in either direction in order to keep inflation on track to meet the 2% target in the medium term."
He gave no clear indication, however, of the future direction of interest rates, nor whether there would be more money injected into the economy through its programme of quantitative easing.