By Daniel Hunter

There is 'cause for optimism' for the UK economy according to the Bank of England governor, Sir Mervyn King.

The Bank's latest Quarterly Inflation Report, 20 years after it issued its first one, shows that there is recovery in sight. However, Sir Mervyn said the outlook for inflation had worsened since November.

He now expects the inflation rate, currently 2.7%, to rise to at least 3% by the summer and to remain above the Bank's 2% target for two years.

The Bank's last report in November said that inflation would fall back towards its 2% target in the second half of this year.

David Kern, Chief Economist at the British Chambers of Commerce (BCC) said that the report highlights uncertainties about future monetary policy.

“Mervyn King tried to paint a less pessimistic picture about the UK’s recent performance, by emphasising that manufacturing and services taken together have recorded positive growth over the past year," he said.

"However it is clear that the outlook over the next three years remains grim. The pace of expansion in the economy will remain weak, and inflation is likely to stay above the target over the next two years. The squeeze felt by businesses and consumers will persist, and given the continued difficulties facing the eurozone, it will be very difficult to rebalance the economy towards net exports, in the short-term.

“Over the next few months there will inevitably be uncertainty, over whether the arrival of Mark Carney as the next Bank Governor will foreshadow major changes in monetary policy. The MPC is already being more forthcoming in signalling its future intentions, as the next Governor prefers.

"Meanwhile, it is disappointing that Governor King does not agree that there would be benefits in the MPC purchasing assets other than gilts, such as securitised SME lending, as part of its QE programme. We believe that the MPC can take its own initiative and purchase such assets, making commercial banks less risk-averse, and stimulating the flow of credit to the economy.”

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