Robust growth will continue in 2004, leading to a closing of the output gap. With the housing market picking up again and the labour market strong, private consumption is likely to expand vigorously. Instability stemming from the housing market remains a risk. The recent appreciation of sterling will damp inflation in the short run, but underlying price pressures are building up. A continuation of the recent gradual tightening of monetary policy should ensure that growth declines towards the trend rate by the end of 2005 and that inflation will not overshoot the 2 per cent target. The government deficit exceeded 3 per cent of GDP in 2003, and a slowdown in spending or a rise in taxation may be required to ensure that the “golden rule” can be comfortably met over the next cycle...