Bank cuts UK's 2011 economic growth forecast to 1.5 per cent

The Bank of England bowed to the inevitable yesterday and downgraded its 2011 growth forecast for the British economy to 1.5 per cent.

As recently as May, the Bank had projected growth of 1.8 per cent. This is the fifth downgrade of its estimates for growth in 2011 since the Coalition Government was formed last June.

Sir Mervyn King, the Governor of the Bank of England, also warned that "headwinds to world and domestic growth... are becoming stronger by the day". The forecast for 2012 was downgraded from around 2.5 per cent to closer to 2 per cent.

Commenting on the UK riots, Sir Mervyn said he was "shocked and appalled". But to try to quash the idea that they are a response to the Coalition's austerity programme, he pointed out that in the past year "the private sector has created over four times more jobs than have been shed from the public sector".

The outlook on inflation in the Bank's latest report was also bleak. According to Sir Mervyn there is a "good chance" that inflation will hit 5 per cent this year, mainly thanks to rising gas and electricity bills, although the Governor stressed that the Bank still expects prices to fall back sharply in 2012, and to return to target around the end of next year.

Among the primary growth headwinds identified by Sir Mervyn was the eurozone debt crisis. He said the European Central Bank had "gone to the outer limit of what a central bank can do" and stressed that any further action must be carried out by European governments themselves.

He said the European Central Bank this week began to buy Italian and Spanish sovereign bonds to ease market fears about default by those governments, but parliaments across the eurozone have not yet ratified last month's emergency agreement to beef up the powers of the European Financial Stability Facility.

"You cannot expect a central bank... to be a substitute for the inability to deal with the fiscal problems facing the euro area. That is a problem for governments, not central banks," he said.

He declined to say if the Bank of England was considering another round of quantitative easing – purchases of UK sovereign bonds – in order to prop up the economy. But he warned "there is a limit to what UK monetary policy can do when large, real adjustments are required".

Sir Mervyn continued to back the Coalition's deficit-reduction strategy saying: "We have a credible medium-term fiscal plan, which many countries do not." He also pointed to the depreciation of sterling as something that should help to assist the recovery by making British exports more competitively priced on world markets.

The Treasury said the new report confirms that the UK economy is continuing to grow and to create jobs.

But Labour's shadow Treasury minister, Chris Leslie, said: "Far from being a safe haven, as our Chancellor complacently claims, last year's recovery in Britain has already been choked off by tax rises and spending cuts which go too far and too fast."