Bank warning as growth forecast cut

The UK's economy will not grow as quickly as previously expected and faces serious threats from the debt storms lashing the eurozone, the Bank of England warned today.



GDP is set to grow by around 1.4% in 2011, the Bank said in its quarterly inflation report, down from its estimate of around 1.8% in May.



It is the second time the Bank has downgraded the UK's growth forecasts this year, having previously expected growth of about 2%.



And next year's growth will also be significantly slower than previously thought at about 2% - down from around 2.5%, the Bank added.



The UK's growth is likely to be "sluggish" but will gradually grow to stronger than normal by 2014, it added.



But many economists said that even after today's downgrades, its forecasts were still too optimistic.



The UK's economy has failed to gather momentum as consumer spending is squeezed because wages are failing to keep pace with the rising cost of living. And its efforts to increase its exports have also been hamstrung by the slowdown in the world economy.



Bank Governor Sir Mervyn King said: "The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker."



In addition, the debt crisis in the eurozone has the potential to impact significantly further on the UK economy.



Sir Mervyn added: "There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang. And these headwinds are becoming stronger by the day."



And he warned the global debt crisis, which has helped create turmoil in world stock markets in recent days, will take "a number of years" to be resolved.



He said: "The problems of indebtedness are large and not easy to tackle but we have to face up to it and find a way through it.



"2008 was not the end of the crisis, it was one stage of the crisis, and we are going through another stage now before, I hope, we come to an end of it."



The Bank warned that the near-term squeeze on consumer spending is set to continue and there is a "good chance" inflation will reach 5% in the coming months, driven by rising utility bills.



But inflation, which was running at 4.2% in June, will fall to 1.8% in two years, which is below its 2% target and slightly less than it expected three months ago.



The Federal Reserve yesterday pledged to keep US interest rates on hold for the next two years but Sir Mervyn refused to say how long UK interest rates would remain at their record lows.



He said the economy was too unpredictable to make such a statement but added that the Bank could raise rates or start another bout of money printing depending on the needs of the economy.



Economists are expecting interest rates to stay at 0.5% for a year or two.



Vicky Redwood, of Capital Economics, said: "Even after the latest downgrades, the MPC's growth forecasts still look optimistic to us, particularly in the light of the further market volatility seen since the committee signed off the report last week.



"Accordingly, we still think that keeping interest rates low won't be enough to generate a strong recovery and that more quantitative easing will be necessary."

PA

Start your day with The Independent, sign up for daily news emails
Life and Style
tech
Arts and Entertainment
Rocky road: Dwayne Johnson and Carla Gugino play an estranged husband and wife in 'San Andreas'
filmReview: In the face of all-round devastation, even Dwayne 'The Rock' Johnson appears a little puny
News
i100
Arts and Entertainment
Bright lights, big city: Melrose Avenue in Los Angeles by dusk
books
Sport
Harry Kane makes Paul Scholes' Premier League team of the season
footballPaul Scholes on the best players, managers and goals of the season - and the biggest disappointments
News
i100
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor