Bank of England cuts 2012 growth forecast for UK economy

The Bank of England has cut its 2012 growth forecasts for the UK economy, raised its near-term inflation outlook and has warned of potential economic damage the eurozone sovereign-debt crisis could inflict.

In its quarterly Inflation Report yesterday, the Bank's Monetary Policy Committee (MPC) cut its estimate of economic growth over this year from 1.2 per cent to 0.8 per cent, which now stands slightly closer to the consensus of private sector economists.

According to its projection, consumer price inflation would remain well above the bank's 2 per cent target until the middle of next year. The MPC, however, lowered its estimate of the rate of inflation at the end of its two-year horizon period to 1.6 per cent, leaving the door open for more monetary stimulus to assist the economy later if it judged that to be necessary.

According to analysts, with inflation further below target and an even slower and more protracted recovery in growth expected, the MPC would feel confident to do more quantitative easing later in the year.

The MPC, last week, voted against increasing its £325 billion asset purchase programme, even as the Office for National Statistics reported in April that the British economy fell into a double-dip recession, contracting by 0.2 per cent in the first three months of the year.

The bank's governor, Sir Mervyn King, while accepting that the outlook for the UK economy had turned out to be slightly worse than the MPC forecast in its last inflation report in February, repeated his long-standing view that falling inflation would alleviate the squeeze on incomes later this year and boost consumer spending.