Bank of England set to cut growth forecast

The Bank of England will paint a gloomier view of the UK's recovery tomorrow in its first assessment on prospects since the return to recession.

Governor Sir Mervyn King is expected to indicate growth of around 0.75 per cent in 2012, compared with the 1.2 per cent predicted three months ago and 2.2 per cent a year ago.

And while inflation has not fallen as expected, with the consumer price index rising in March to 3.5 per cent, the Bank will stick by earlier expectations that the figure will fall to the 2 per cent target by the end of this year.

The Bank stopped short of increasing its quantitative easing programme last week despite a 0.2 per cent decline in the first three months of the year, meaning the UK is in a technical recession,

Sir Mervyn is already braced for a choppy year, with events such as Olympics and an additional bank holiday granted for the Queen's Diamond Jubilee expected to see growth "zig zag" throughout 2012.

But while economists expect the Bank to cut growth estimates for 2012, they predict the downward revision to figures for 2013 will not be much lower than 2.8 per cent in its last report.

Alan Clarke, UK and eurozone economist at Scotiabank, believes the Bank will forecast growth of around 0.75 per cent in 2012.

He said: "The economy hasn't grown for six months, and the headline second quarter GDP data are unlikely to stray much above zero, even if the underlying picture is more robust."

In its last report, the Bank forecast GDP growth of around 1.2 per cent this year and around 2.8 per cent in 2013, while inflation will hit its 2 per cent target in the final quarter of 2012 and fall to as low as 1.5 per cent the following year.

The Bank has previously questioned the ONS figures, calling a drop in construction output "perplexing" and adding that underlying growth in the UK appeared to be strong.

But the picture is mixed as exporters are now facing fresh headwinds from a strengthening pound and weak demand in the euro zone, where the economy stagnated in the first quarter.

Homeowners are in for a boost as the report is expected to show that interest rates will be maintained at their historic low of 0.5 per cent, or close to that, for at least several more months.

The Bank pumped £50 billion into its quantitative easing (QE) programme in February but members of the monetary policy committee (MPC) vetoed increasing the stock of asset purchases from £325 billion in their last meeting.

Vicky Redwood, chief UK economist at Capital Economics, said while inflation forecasts will be roughly the same tomorrow as in February's report, this does not mean further QE will be ruled out.

She said: "After any downgrade this week, the MPC's new growth forecasts are likely to remain far too optimistic. Accordingly, we continue to expect a third round of QE to start later this year."

PA