- The UK has experienced two years of weak growth accompanied by stagnant productivity and above-target inflation
- Future GDP growth will be reliant upon on improvements in the global environment and productivity growth
- The near-term outlook to inflation is now higher, but the committee maintain that the risks to CPI inflation being above or below the 2.0% target are broadly balanced in the medium term.
- Easing external pressures and a partial recovery in productivity growth – as well as a weak demand environment – are likely to bear down on inflation.
In financial markets policy easing by the ECB has moderated some of the problems facing the Eurozone, for example by bringing down Spanish and Italian debt yields. UK bank funding costs have been reduced by the Bank's Funding for Lending Scheme (FLS) and this should – over time – ease domestic funding conditions.
Global demand growth has been subdued, though policymakers in several countries have taken action to mitigate this.
Domestic demand has been weak for some time, and spending by households and businesses remains below pre-crisis levels.
UK growth is estimated to have been 1% in the third quarter of the year, though the strength was due to a number of temporary factors. Underlying growth is likely to remain sluggish in the near term. The outlook for the recovery remains uncertain and is hinged on the progress of external events, particularly in the Eurozone. There are, however, some positive prospects for growth. For example, some pickup in productivity growth seems likely, and FLS may well boost lending.
The committee's judgement is that the economy is likely to see a sustained but slow recovery over the next three years.
Inflation is likely to be higher than previously expected in the near term as tuition fees and energy price rises have pushed up the figure in recent months. However, inflation is likely to fall back in the second half of next year as the impact of external pressures eases and a recovery in productivity alleviates pressure on domestic costs. The outlook for inflation remains uncertain particularly as commodity prices can be highly volatile.
The committee expect that inflation is likely to move down in the second half of 2013 and see risks to inflation as broadly balanced over the medium term.