The governor of the Bank of England, Mervyn King attributed the rise in inflation to the rises in energy and import prices and the increase in the standard rate of VAT.
Lenders responding to the Credit Conditions Survey reported little significant increase in the overall availability of secured credit over recent quarters as credit conditions for borrowers remained significantly more restrictive than prior to the financial crisis.
Persistence of relatively tight credit conditions is likely to contribute to the historically low level of activity in the housing market witnessed today, the Bank said.
If the level of property transactions seen on average over the past three years were to persist, it would take almost twice as long for the private housing stock to turn over as in the decade prior to the financial crisis said the report.
King said: “The mood in markets has taken a sharp turn for the worse. Much of this reflects rising concern about the sustainability of indebtedness in the euro area and the outlook for growth and fiscal policy in the United States.
“The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker.”
King went on to say that the greatest risks to the prospects for global demand came from the euro area and the substantial challenges faced by several member countries as they sought to ensure the sustainability of their fiscal positions and preserve the stability of their bank systems.
“There is a limit to what UK monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months. But it can ensure that policy is set in such a way that these adjustments take place against a backdrop of low and stable inflation. And that is exactly what the MPC will do,” he said.
Max Johnson, broker at Currency Solutions, said: “Once again the Bank of England has downgraded the UK's growth forecast and rightly so. After nine months of stagnation, the economy is stubbornly refusing to pick up.
“It was telling that Mervyn King placed much of the blame for the British economy's poor performance on global factors. There is a good deal of truth in this, but it's also true that our own economy is at best listless.
“Even though inflation is more than double the bank's target, it has had to abandon any hope of keeping inflation in check. It is resigned to it reaching 5% by the end of the year.
“Its main inflation-fighting weapon, interest rates, will stay firmly in the holster until late next year, as the Bank dares not put up rates and risk choking off the already sputtering economy.
“So while the Bank is condemned to more chasing of its own tail, prospects for the economy and the pound look sombre.
“In the immediate aftermath of Mervyn's speech, the pound fell but then rose again as investors put the UK's position into perspective. It's bad here, but not as bad as across both the Channel and the Atlantic.”
Nick Hopkinson, director of PPR Estates, said: “High Inflation continues to “surprise” the Bank of England policy makers in a way that “accidentally” helps reduce the national debt.
“Regardless, their hands are completely tied as we cannot afford more quantitative easing and interest rate rises are totally out of the question while UK PLC’s GDP growth rates remain so anaemic.
“Amongst other things, higher fuel bills hitting the doormats this month will only add more financial stress to many struggling households.
“With economic headwinds likely to reach gale force I fear we are looking at further falls in house prices and mortgage lending over the rest of this year.”
