Bank of England slashes forecast amid stock market and euro crises

August 10, 2011
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The Bank of England has reduced its growth forecast for the UK economy from 1.8% to around 1.5% as the hoped for economic recovery falters amid global stock market crashes and the euro debt crisis.

The Bank had already cut its forecast earlier this year and today’s further reduction signals its increasing concern that the weaknesses in the Eurozone and US will impact on the UK economy.

He predicted the “long and deep squeeze” on household’s budgets would continue because of such factors as higher energy bills, but added that recent falls in oil and other commodity prices could mean living standards rising earlier than expected.

And there was better news on inflation, with Bank Governor Mervyn King saying it was likely to fall to around 1.8% in two years’ time after peaking at the 5% mark later this year.

The Bank’s revised forecast means interest rates are likely to remain at their historic low of 0.5% for the remainder of this year and into 2012.

Short-term market interest rates are likely to rise to 0.8% by the end of 2012, suggesting that there will be only a single quarter-point increase in rates next year.

Today’s Bank forecast came against a backdrop of worsening economic figures – the last from the Office for National Statistics showed growth of just 0.2% during the second quarter of 2011.

And ONS published more disappointing figures yesterday for manufacturing and exports – two areas of the economy the Government had predicted would lead the recovery.

Manufacturing output fell by 0.4% in June compared with a 1.8% increase in May. Analysts had been expecting output to have risen. The UK’s trade deficit in goods and services widened to £4.5bn in June, up from £4bn in May.

The CBI recently lowered its growth forecast to 1.3% from 1.7%.

Most private sector economists polled by the Reuters news agency see 1.2% growth this year, rising to 1.9% in 2012.

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