Britain's economy will grow more slowly this year and next than expected three months ago due to a weaker global economy, meaning inflation is likely to fall rapidly next year, central bank forecasts showed,
In its quarterly Inflation Report, the Bank of England gave no indication that there was any urgency to raise interest rates or engage in more quantitative easing.
The US Federal Reserve on Tuesday took the unprecedented step of pledging to keep interest rates near zero for at least two more years, and said it would consider further steps to help growth, while the European Central Bank overcame some internal opposition to begin buying the bonds of debt-laden Italy and Spain this week.
The Bank forecast that inflation would peak around 5 percent later this year -- the same as it predicted in May -- before falling steadily to 1.8 percent in two years time, a shade lower than it expected three months ago. The Bank targets 2 percent inflation.
This marked fall in inflation comes despite the fact that much less monetary tightening is factored into the Bank's forecasts than in its May projections.
Short-term market interest rates are only predicted to rise to 0.8 percent by the end of 2012 -- implying just one quarter point increase in rates from their current record low of 0.5 percent. This compares to a 1.7 percent rate in May's forecast.
"At its August meeting, the Committee judged that the outlook for the global economy had deteriorated and that GDP growth in the United Kingdom would pick up only gradually," the Bank said.
There appeared to be more consensus on the 9-member Monetary Policy Committee than three months ago, with the report noting "a range of views" about the outlook on growth and inflation, rather than the "wider than usual" range referred to in May.
The Bank said that there were substantial downside risks to the economic recovery, the biggest of which came from the euro zone fiscal crisis.
"Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy," the Bank said. The risk of this was hard to quantify, and therefore not factored into the BoE's forecasts, it said.
Nonetheless, the Bank still cut its growth forecast for 2011, and to a lesser degree, going forward. By the fourth quarter of 2011, the Bank now sees an annual rate of growth of 2.0 percent, down from 2.5 percent in May.
After two years, growth is forecast to be running at an annual rate of around 2.7 percent, a fraction lower than in May.
City A.M. Reporter