The Bank said the pace of growth was weaker than it had predicted just three months ago, but governor Mervyn King said he was hopeful of a gradual recovery in output and that the downside risks to growth were now less significant.
The central bank’s forecasts show that inflation, which it is charged with keeping at two per cent, would stand at around only 1.2 per cent in two years – the usual policy horizon – if interest rates start going up later this year. Inflation is seen below two per cent even if rates stay put.
The economy, meanwhile, recovers only very slowly, with output not returning to pre-crisis levels until around mid-2011, according to the forecasts. GDP growth is seen at a rate of around 3.5 per cent in two years’ time.
The cut to the central bank’s growth forecasts came as leading think-tank the National Institute for Economic and Social Research (NIESR) forecast the economy grew 0.4 per cent in the quarter to January.
But the think-tank said: “The improvement is more the consequence of the fact that output in October was very weak rather than a clear indication that a more substantial recovery is underway.”
While King said that a double-dip recession was unlikely, he nonetheless warned that it was far too soon to conclude that no more purchases of gilts will be needed. The Bank paused its quantitative easing policy last week.
Contrary to expectations, the Bank of England revised down its expectations for the path of inflation, saying that the margin of spare capacity would offset inflationary pressures.
But it said that the inflation rate is likely to rise well above three per cent in the near-term, incurring a letter to the chancellor.