Bank will be forced to slash growth forecasts

Predictions made in February would require 'miracle' to come true

The Bank of England is set to slash its optimistic growth forecasts when it unveils its quarterly Inflation Report on Wednesday.

In its most recent report in February, the Bank's rate-setting Monetary Policy Committee forecast that the growth rate would average around 1.5 per cent in 2012, rising to around 2.75 per cent in 2013. This was considerably higher than most private-sector forecasts even at the time. And since last month the economy has slumped into a double-dip recession.

"The Bank's forecast assumes a miracle," said Alan Clarke of Scotia Capital. "Our forecast is for growth of 0.5 per cent year-on-year and we are probably at the optimistic end of the spectrum."

Mr Clarke said that the Bank would probably slash its 2012 growth forecast to an average rate of 0.75 per cent. Mr Clarke added: "The less said about the Bank's [2013] projection ... the better."

Vicky Redwood of Capital Economics also predicted that the Bank would have to make a change to its projections this week. "We expect the growth forecast to be revised down fairly significantly," she said.

In February, the MPC forecast that growth over the first quarter of 2012 would come in at 0.5 per cent. Last month the Office for National Statistics said the UK economy actually contracted by 0.2 per cent over the three months. And downward revisions to the construction figures for March last week pushed that down further to a 0.3 per cent fall.

The MPC last week voted not to extend its £325bn monetary stimulus programme, despite the weakness of the British economy. The minutes of the most recent MPC meeting showed that its members believe the UK is in a healthier state than the official figures are reflecting. But members have also expressed concerns that inflation is not falling back as rapidly as the Bank hoped.

The most recent reading of the Consumer Prices Index showed that the annual inflation rate increased from 3.4 per cent in February to 3.5 per cent in March, breaking a trend of falling inflation seen since last summer.

The Bank of England projected in February that CPI would fall to 1.87 per cent by the end of this year, and 1.77 by the end of 2013, below the independent monetary authority's 2 per cent target.

Mr Clarke said that he expects the MPC to revise its inflation projections upwards, even as it downgrades its growth forecasts. "Our best judgement is that the two-year ahead projection will be somewhere in the region of 1.6 to 1.7 per cent year on year," he said.

City analysts will be closely watching the Inflation Report and the introductory statement from the Bank of England Governor, Sir Mervyn King, for signs that the MPC could restart its sovereign bond buying programme, known as quantitative easing, in the coming months in order to prop up the economy. "Even after any downgrade this week, the MPC's new growth forecasts are likely to remain far too optimistic," said Ms Redwood. "Accordingly we continue to expect QE3 to start later this year."