The consumer prices index (CPI) inflation was 3.5 per cent in March, down from a peak of 5.2 per cent in September 2011, according to the Bank of England's May Inflation Report.

Global growth remained uneven. Output in the eurozone contracted in the fourth quarter of last year; business surveys indicate a further fall in first quarter of 2012.

The Bank warns that inflation is likely to remain above the 2 per cent target for the next year or so.

In a speech accompanying the report, the Bank’s governor, Mervyn King, said:

Weak growth and high inflation have been the unavoidable consequences of the financial crisis, developments in global commodity prices, and the need to rebalance our economy. The biggest risk to the recovery stems from the difficulties facing the euro area, our main trading partner.

At 3.5 per cent in March, CPI inflation remains well above the 2 per cent target. That largely reflects past increases in energy and import prices. In contrast, low rates of wage increases have ensured that domestic cost pressures are subdued.

The choice facing the MPC continues to be a difficult one. And the task is made harder by the degree of uncertainty about the paths that output and inflation will follow. But the big picture is clear and hasn’t changed since February. We are navigating through turbulent waters, with the risk of a storm heading our way from the continent.

Since February's inflation report, the Bank’s Monetary Policy Committee (MPC) has maintained bank rate at 0.5 per cent and the size of its asset-purchase programme at £325bn.

The Office for National Statistics (ONS) estimates that the UK’s economy shrank a little in both the first quarter of 2012 and the final quarter of 2011. Over the past year or so, two factors have hampered the recovery and rebalancing. First, higher-than-expected world commodity and energy prices have squeezed real take-home pay, dampening consumption growth. Second, credit conditions, far from easing, have in some cases become tighter.

The direct and indirect exposure of UK banks to the eurozone's periphery have affected funding costs as the challenges of tackling the indebtedness and lack of competitiveness in those countries have intensified.