Warning over inflation target

The bank's last inflation report in May predicted inflation would return to target around the end of this year.

Spencer Dale said the near-term outlook for growth and inflation had "deteriorated" over the past couple of months, and that the economy would not get back to normal "for an awfully long time".

"Inflation has come out a little higher than expected, and the news on VAT in the June budget means that the time it will take inflation to get back to target will be pushed out, and I expect it will be above target until the end of next year," Mr Dale said.

The government has announced plans to raise VAT sales tax to 20 per cent from 17.5 per cent from January 1 as part of emergency budget measures designed to virtually eliminate a record peacetime deficit over the course of the five-year parliament.

"Likewise, there are some signs that growth may be softening, again partly reflecting the June budget," Mr Dale said.

"We've also seen tensions in the financial markets increase, related to concerns about sovereign debt issues in Europe.

"That has also affected the ability of banks and com-panies to raise cash," he added.