The eurozone crisis presents the biggest challenge to the UK economy which will likely follow a "zig zag" pattern of uncertain growth, said the governor of the Bank of England yesterday.
In the Bank's February inflation report, Mervyn King warned the UK faces a host of "substantial headwinds" as ongoing problems in the eurozone and fiscal consolidation at home combine to put a brake on growth.
"These remain challenging times for the UK economy," said King. "Substantial headwinds are hampering our recovery and rebalancing."
Pointing to the need to also repair balance sheets, King said the country's recovery will be choppy, erratic and unpredictable.
"For much of this year, there is likely to be a "zigzag" pattern of alternating positive and negative quarterly growth rates reflecting the additional bank holiday for the Queen's Diamond Jubilee, so that it will be harder than usual to interpret the official estimates of growth."
King said the ongoing sovereign debt crisis in the eurozone poses the greatest danger to the recovery.
"The biggest risk to the recovery stems from developments in the euro area, where there remain concerns about the indebtedness and competitiveness of some member countries," he said.
"As in the August and November inflation reports, the committee has judged that there is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area."
But King also said the latest round of quantitative easing, which saw the Bank inject a further £50bn into the economy earlier this month, is likely act as a spur to growth.
He also said inflation - which fell to 3.6% in January from 4.2% in December - will continue to decline as the impact of external factors fall out of the equation.
But he added unforeseen factors, such as disruptions to oil supplies, could place upward pressure on prices.
In the report, the Bank raised its inflation forecast for two years' time to around 1.8% - more than some economists had predicted. King said inflation expectations have risen since its November report due to the Bank's loose monetary policy and rising commodity prices.
Meanwhile, he used the report to justify a monetary policy which has seen the base rate flatline at a historical low of 0.5% since March 2009 and the quantitative easing programme surge to £325bn.
"If we were to raise interest rates to such a level now, that would serve only to turn a gradual recovery into a recession, put more people out of work, and cut the value of assets on which many savers depend."
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