Wednesday, 13 August 2008

Bank of England slashes UK growth forecasts

By Angela Monaghan
Last Updated: 11:11am BST 13/08/2008

Bank of England Governor Mervyn King has warned that next year will be a 'painful' one for Britain as the slowdown in the housing market deepens and the cost of living rises further.

Its long-awaited quarterly Inflation Report provided gloomy reading with the Bank now expecting the economy to virtually ground to a halt in the first three months of next year as the surge in petrol and utility bills eat away at consumers' spending power.

The Bank expects the economy to grow just 0.1pc in the first quarter, down from a projection of just 1pc made at its last report in May.

The downward revisions will be embarrassing for Chancellor Alistair Darling, who is still forecasting that the flagging economy will muster growth of 2pc this year and 2.5pc in 2009.

Mr King said that the outlook for both growth and inflation had deteriorated more sharply than it had expected when it published its last quarterly report in May.

"It may still be summer but there is a feeling of chill in the economic air," Mr King said at a press conference today. "This adjustment to our economy cannot be avoided. As a result, inflation is rising and growth is slowing."

If the UK does grow at such a low level, the chance of a technical recession, with two successive quarters of contraction, is significant.

Calculate your inflation rate
Inflation: How to protect yourself
The Bank also warned today that inflation is likely to hit 5pc in the coming months, rather than the 4pc peak it was expecting earlier in the year.

The Consumer Prices Index - the Government's preferred measure of inflation - rose to 4.4pc in July compared with 3.8pc in May, figures from the Office for National Statistics showed yesterday.

Sterling tumbled to almost $1.88 in reaction to the news as City traders increased bets that the Bank will eventually have to cut interest rates.

However, the Bank said today that inflation will fall below its 2pc target within two years should the Monetary Policy Committee keep interest rates at their current level of 5pc.

Last week the MPC voted to hold rates at 5pc as it grapples with the twin threat of inflation, which is squeezing disposable incomes, and the economic slowdown.

Unemployment figures today delivered the Bank a sharp reminder of the slowdown, with the number of Britons claiming benefits rising in July for the six month in a row.


No comments: