The Bank of England has said inflation will stay high next year, and the economy is likely to remain weak.


In its quarterly inflation outlook it blamed a combination of the rising price of raw materials, higher energy bills and next year's increase in VAT.
Governor Mervyn King said there was a risk consumer spending would slow, due to rising taxes and higher debt.
Although the outlook remained uncertain, he said the recovery was likely to continue.
The Bank gave no clear indication over the direction of interest rates, nor whether there would be more money injected into the economy through its programme of Quantitative Easing.


The Bank's Governor, Mervyn King, said the risks to the economy were "on the downside" and growth was likely to slow from its current pace.
He pointed to a slowdown in construction, which as been one of the key drivers of stronger-than-expected economic growth earlier this year.
The most recent gross domestic product figures (GDP) showed growth of 0.8% in the third quarter of this year.
Charts in the extensive report show the Bank believes there remains only a very small possibility of the economy beginning to shrink again.



External forces


Mr King, however, said the strength of the recovery depended "heavily" on developments in the rest of the world, especially as public spending was likely to grow more slowly in future.



Consequently, he had a warning for the G20 countries, who are preparing for this weekend's meeting in South Korea.
"The biggest conjunctural 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 in recent weeks that some economic policies, such as the US central bank's fresh round of quantitative easing, and proposals for a limit on the size of surpluses have been designed benefit specific economies 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 G20 countries are expected to discuss the issue of currency levels and the role they play in trade imbalances, with developed countries desperate to sell more to and buy less from developing countries.


The Prime Minister, David Cameron, is finishing a trade mission to China to try to improve exports to the fast-growing country.
Mr King said that UK export growth had been disappointing: "If you look at the short-run picture for exports, it is clear that the overall data, as we have described in the report, have maybe not picked up overall in the way that we might have thought."
Bank split

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, and compared it to the team spirit of England's cricketers: "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... in order to keep inflation on track to meet the 2% target in the medium term."


from: BBC News - Bank of England says inflation will be above 2% in 2011