BoE: inflation to remain above target until end of 2011

The Bank of England has revised down its forecast for UK economic growth and expects inflation to remain above the 2% target until the end of next year.

GDP growth was estimated to have risen 1.1% in the second quarter, with 3.4% growth predicted for the whole year. The Bank now expects the economy to grow about 2.5% in 2011. It says growth in the first half was "close to its long-run average". BoE governor Mervyn King says this is a "significant improvement" on last year, although risks to growth remain weighted to the downside.

King says the overall outlook for the UK is weaker than the Bank predicted in the May Inflation Report, caused by faster fiscal consolidation, a slower improvement in credit conditions, and softening business and consumer sentiment. King says the economy will continue to improve, but it will be "a choppy recovery".

Meanwhile Consumer Prices Index (CPI) inflation was 3.2% in June, well above the 2% inflation target. King says this is a result of the temporary effects of the VAT rise from 17.5% to 19%, the impact of rising oil prices, and falling sterling. These factors are likely to keep inflation above target until the end of next year, but it should fall back in the longer term, he adds.