Presenting the latest quarterly inflation report, Mervyn King, Governor of the Bank of England, states that lending by commercial banks would “probably remain weak over the next three years”. Mr King added that inflation may “rise sharply over the next few months”.
The increase would be triggered by VAT returning to 17.5% on 1 January 2010 and higher petrol prices. However, he said inflation, which is currently at 1.1%, would then fall back in the medium term.
“The past year has been extremely painful for most economies around the world,” said Mr King. “There is a more buoyant picture looking ahead, that is encouraging. But this does not alter the extent of the challenges facing the economy.”
Mr King’s comments come a week after the Bank decided to pump an extra £25bn into the economy under its quantitative easing (QE) programme, which aims to restore both commercial lending and economic growth. This brings the total spent on QE – a policy of injecting money into the economy through buying bonds from banks and other companies – to £200bn.
The Bank’s rate-setting Monetary Policy Committee also kept UK interest rates on hold at 0.5% for the eighth month in succession.
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