Bank of England cuts growth forecasts

Britain’s economic prospects have been downgraded by the Bank of England, which warned yesterday that the crisis in the eurozone posed the largest stumbling block on the road to recovery.

However, even after slashing its growth forecasts to 0.8 per cent in 2012 and 2 per cent in 2013, down from previous predictions of 1.2 per cent and 3 per cent respectively, economists said the Bank was still being overly optimistic.

The prospect of further quantitative easing (QE) also raised its head, with economists predicting the Bank’s monetary policy committee (MPC) could start up the printing presses again, possibly within the next two months, to boost the economy if conditions do not improve.

David Tinsley, UK economist at BNP Paribas, said: “We think there is a high probability – we put it currently at 45 per cent – that the MPC will announce more asset purchases in the June or July policy meetings.”

The Bank pumped £50 billion into its QE programme in February, but members of its monetary policy committee (MPC) voted against increasing the stock of asset purchases from £325bn at their last meeting.

Vicky Redwood, chief UK economist at Capital Economics, said: “We still expect QE to be resumed later this year – and even within the next month or two if the eurozone crisis continues to escalate.”

Hard-pressed consumers are unlikely to get any respite from rising prices in the near future, as the Bank said the rate of inflation, currently 3.5 per cent, would remain above the government’s 2 per cent target beyond the end of this year.

Governor Sir Mervyn King said he now expects inflation to return to target in the second half of 2013.

King said: “We are navigating through turbulent waters, with the risk of a storm heading our way from the continent.”

The eurozone was “tearing itself apart without any obvious solution”, he said, adding that contingency plans were being drawn up by the Bank, the Treasury and Financial Services Authority in the event of a major financial catastrophe, such as the break-up of the single currency area.

Greece will go to the polls again on 17 June after this month’s inconclusive elections. The country could be denied further EU bail-out funds if a party opposing necessary austerity measures comes to power, which could in turn lead to Greece exiting the euro.

Caxton FX analyst Richard Driver said: “The Bank of England is clearly very concerned by the threat posed to the UK economy by negative developments in the eurozone crisis, and rightly so.”

David Kern, chief economist at the British Chambers of Commerce, said: “Though the Bank of England has revised down forecasts for growth, they may still be too optimistic. That said, there will be a gradual strengthening in the pace of UK growth from the second half of 2012 onwards.”

The Bank warned that a loss of output caused by the Queen’s Diamond Jubilee celebrations could knock 0.5 per cent off GDP, making it harder for the UK economy to pull out of recession in the second quarter of the year, but increased spending around the Olympics could boost the economy by a little more than 0.5 per cent in the third quarter.