The Quarterly Report on Inflation, prepared by Bank staff, states that domestic inflation developments continue to be shaped by the balance between two opposing forces: intensifying cost pressures and the weakness of domestic demand. Increases in commodity prices, particularly oil and food prices, are likely to keep inflation elevated throughout most of 2011. Reflecting these factors, the Bank expects the annual average rate of consumer price inflation to be 3.9% in 2011. Inflation is projected to fall back to an average of 3.6% next year as a result of subdued domestic demand.

In the baseline projection, the 3% inflation target, consistent with price stability, can be achieved by the end of 2012 by keeping interest rates at their current level for an extended period.

The Bank has revised down its outlook for domestic economic growth relative to the March projection; and the level of output is likely to remain below its potential in the next two years. The Bank expects economic growth to be 2.6% in 2011 and 2.7% in 2012. The measures taken by the Government to improve fiscal sustainability and create the conditions for longer-term growth are likely to lead to a temporary slowdown in household income growth. Exchange rate uncertainty, stemming from the sovereign debt problems within the euro area, is expected to prompt households to increase their precautionary savings.