Britain’s economic recovery should remain on track despite the government’s deficit-busting measures, the Bank of England said yesterday.

But the Bank warned in its quarterly inflation report – the first since the spending review – that the strength of the recovery remains highly uncertain, with households and businesses likely to tighten their belts.

Britons also look set to be hit with a sharper-than-expected rise in the cost of living over the coming months due to a combination of soaring commodity costs, energy bill hikes and the impending rise in VAT as well as the impact of a weak pound, the Bank said.

Governor Mervyn King said the UK’s economic recovery was likely to continue, adding that he was not expecting a sudden, sharp slowdown.

UK growth is expected to be “broadly similar” to that forecast in the August report, with the recovery looking to have peaked in the second half of this year and falling back to around an annual rate of 2.5 per cent in 2011 before gradually picking up to just over three per cent in late 2012.

The report suggested the Bank was still in wait-and-see mode in terms of whether to bolster money-boosting efforts through more quantitative easing.

Mr King added: “At present, there are large upside and downside risks to inflation. Monetary policy has to balance these risks.”

Mr King said: “Overall, the risks to growth are on the downside, but the central view is that there will not be a significant slowdown.”

However, he cautioned, the UK economy was vulnerable to “external risks”. “Whether the recovery will be sustained depends heavily on developments in the rest of the world,” he added.

The Bank’s report confirmed that growth had been stronger than it had expected during recent quarters, with GDP estimated to have risen by a robust 0.8 per cent in the third quarter.

This is unlikely to be sustained given recent industry surveys showing falling levels of output and confidence, added the report.

The Bank’s forecast suggests households will face a rise in inflation to around 3.5 per cent in the run-up to Christmas and remain over three per cent in the first half of 2011 before easing back and sliding below the two per cent target through 2012.

Mr King said he believed the private sector should be robust enough to offset government cuts, having created a net 250,000 jobs already in the past year.