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Economy 'just starting out' on road to recovery

The UK is entering the early stages of its recovery from recession but still faces many challenges, Mervyn King, the Governor of the Bank of England has said.

The Bank’s quarterly inflation report has been published and shows the Bank more optimistic about growth levels in the future.

Predicting that the economy will return to growth at the beginning of 2009 and will expand by 3.75 per cent in 2011, up from its previous estimates, the Bank also forecast that inflation will see a temporary increase.

One effect on inflation will be the reversion to the old VAT rate of 17.5 per cent on 1 January 2010.

The bank expects inflation to rise above the 2 per cent target set by the Treasury before slipping back down to 1.6 per cent later in 2010.

However, Mr King warned that commercial bank lending could remain “weak” for as along as three years.

Mr King said: “The past year has been extremely painful for most economies around the world. There is a more buoyant picture looking ahead, that is encouraging. But this does not alter the extent of the challenges facing the economy.”