The Bank of England forecast yesterday the British economy would grow less than expected this year amid concerns over the eurozone debt crisis, markets turmoil and government austerity measures.
The BoE predicted that gross domestic product would grow by about 1.4 per cent this year, compared with a previous forecast of 1.8 per cent in May.
The central bank also expects the economy to expand two to three per cent in 2012 but growth would remain sluggish in the near term, reflecting the continued squeeze on household incomes from high inflation.
“The outlook for output growth remains highly uncertain,” the Bank of England said in a quarterly report which detailed its latest economic forecasts.
“The greatest risks to the prospects for global demand come from the euro area and the substantial challenges faced by several member countries as they seek to ensure the sustainability of their fiscal positions and to preserve the stability of their banking systems.
“Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy.”
However, the BoE’s latest calculations did not take into account recent stock market turmoil as the eurozone crisis and the weak US economy sparks fears of another sharp global economic downturn.
BoE governor Mervyn King, addressing reporters yesterday, said that the outlook for the world economy had “deteriorated” and blamed the eurozone debt debacle and concerns over US fiscal policy for recent market chaos.
Over the past fornight, London’s FTSE 100 index has fallen about 16 per cent, stripping £250 billion (€282 billion) from the value of Britain’s top blue-chip companies that include BP, HSBC and Vodafone.
But markets edged higher yesterday after the US Federal Reserve pledged overnight to keep near-zero interest rates for the next two years in an effort to bolster a stalling US economy.
Analysts fear that financial market chaos could sap the British economy by damaging consumer and business confidence.
The BoE said that inflation was likely to hit five per cent later this year, driven by soaring domestic electricity and gas bills, before falling back throughout 2012.
The bank’s main task is to use monetary policy as a tool to keep annual inflation rate close to two per cent, which is far below the current level.
British inflation slowed to 4.2 per cent in June from 4.5 per cent in May as cheaper toys and televisions helped to offset high food and energy prices.
Yesterday’s report was published one week after the BoE left interest rates at a record low of 0.50 per cent for the 29th month in a row due to fragile economic growth, mounting US woes and the worsening eurozone debt crisis.