The stark forecast came as the Bank's Monetary Policy Committee prepares to meet on Wednesday to decide whether to raise rates and the Chancellor, Gordon Brown, faces renewed calls to help Britain's battered manufacturing sector.
A spokesman for Mr Brown dismissed reports that he was under pressure from Cabinet colleagues to prevent sterling's continued rise on the foreign exchanges. He also rejected suggestions that the Chancellor could in any way interfere in the deliberations of the MPC or seek to "assist" its decision, having handed over control of interest rates to the Bank less than 12 months ago.
Ministers also played down reports of a Cabinet split over the pound and denied that there was any chance of Mr Brown intervening.
David Blunkett, the Secretary of State for Education and Employment, who was reported to be concerned that the strength of sterling might hit jobs and damage the Welfare to Work programme, said that if unemployment rose the programme would be even more vital.
"It's a unique experience for an incoming Labour government to have the challenge of a rising pound. We want a situation where we can actually ensure that there are people available to do the present jobs that are available," he said.
Mr Blunkett did not deny the suggestion that he had made representations to the Chancellor on the subject, though. It had been reported that John Prescott and Margaret Beckett were also very worried about sterling.
In a report out today Professor Douglas McWilliams, of the Centre for Economics and Business Research, says that the strength of sterling is almost certain to result in a mini-recession.
The centre's latest quarterly economic review also forecasts that employment will drop by 420,000 while unemployment will rise by 350,000 over the next two years.
Professor McWilliams criticised the Chancellor for focusing last month's Budget tax increases on business rather than the personal sector and the MPC for ignoring international economic conditions. "An economic slowdown was inevitable, but the mini-recession that we are likely to see is the result of economic mismanagement," he added.
City opinion is divided as to whether interest rates will go up this week for the sixth time since Labour came to power. James Barty, an economist with Deutsche Morgan Grenfell, said: "My view is that they should get it over and done with and raise rates this week. But my guess is they won't."
However, David Kern, chief economist at NatWest, said the need for another rate rise was receding. The Confederation of British Industry, under pressure from exporters, has called on the Bank to give a clear indication that rates have peaked and can be expected to start to fall.
Martin O'Neill, chairman of the Commons Select Committee on Trade and Industry, said yesterday that it might hold an inquiry later this year on how the pound was affecting manufacturing. A strong indication that interest rates were not likely to rise again would be very helpful, he said.
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