“The marked deterioration in the external environment, together with the domestic headwinds stemming from the fiscal consolidation and squeeze on households’ real incomes means growth looks set to be weaker,” the bank said in its inflation report.
The Bank slashed its growth forecast to around one per cent for 2012, while it now expects inflation to fall below its two per cent target next year.
A lack of “credible and effective policy response” in the Eurozone has increased uncertainty and damaged the UK’s prospects of recovery, it added.
At a doom laden press conference, Bank of England governor Sir Mervyn King warned that prospects for the economy were grim should the Eurozone crisis not improve.
“There is no meaningful way to quantify the most extreme outcomes associated with developments in the Eurozone,” he said.
Plummeting real incomes and lower consumption have been major influences on lower GDP, the report said, adding falling inflation and a gradual economic recovery should begin to reverse that trend towards the end of 2012.
“The squeeze was an unavoidable consequences of movements in world energy and other commodity prices, he claimed.