Gloomy Bank cuts outlook

THE BANK of England yesterday said growth will recover more slowly than previously predicted but raised its forecast for future inflation to about 1.5 per cent in a gloomy assessment of the outlook for the UK economy, suggesting monetary policy may need to remain loose for some time.<br /><br />In its quarterly inflation report the BoE central GDP forecast was much weaker than in February, expecting a contraction of about 4.5 per cent this year before growth resumes in early 2010. This cautious outlook reflects the Bank&rsquo;s gloomier view on bank lending and weaker-than-expected activity in the first quarter.<br /><br />Bank governor Mervyn King, who stressed the uncertainties surrounding the forecasts, said: &ldquo;There are real risks from the nature of the downturn and the role of the financial sector, that mean this could be a slower return to normal growth paths than we might have expected had this just been a normal business cycle.&rdquo;<br /><br />Inflation is expected to fall to 0.5 per cent this year before rising to about 1.5 per cent &ndash; above previous forecasts &ndash; reflecting a boost to prices from the weak pound plus strong gains in import prices. The Bank said: &ldquo;It is more likely than not, that consumer price index inflation will be below the two per cent target in the medium term.&rdquo;<br /><br />Jonathan Loynes, chief European economist at Capital Economics, said: &ldquo;The message is that any renewed tightening of policy &ndash; either by reversing quantitative easing (QE) or a rise in interest rates &ndash; is a long way off.&rdquo;<br /><br />The impact of QE will not be seen for some six to nine months said King, &nbsp;but he added that the Bank will take whatever steps are necessary to try to keep inflation close to the target.