The UK economy has “cause for optimism” and “a recovery is in sight”, according to the Bank of England’s governor Sir Mervyn King.

Speaking on the subject of the Bank’s latest Inflation Report, King said that the “bulk of the economy – primarily the services and manufacturing sectors together – actually grew at the steady, if unspectacular rate of 1.2 per cent over 2012”. He added that this was “considerably stronger than the consensus expectations for growth in Japan and the euro area”.

He nevertheless warned that the road ahead would not be a smooth one due to a number of factors.

“Our economy faces big challenges stemming from an abrupt and substantial reassessment of future economic prospects triggered by the financial crisis. Heightened uncertainty about the solvency of banks has lead to a reduction in the supply of credit,” King said. He added that inflation is also expected to rise to at least three per cent.

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