Britain’s economy faces a “choppy recovery” over the next two years as growth slows and inflation looks to remain at a higher level than forecast, the Bank of England (BoE) said on Wednesday.
Presenting the bank’s quarterly inflation report, BoE governor Mervyn King warned that a slow and difficult recovery could increase fears of a so—called double dip recession.
The bank said its latest forecasts showed slower growth for 2011.
It now expected the economy to grow by around 2.5 per cent next year, as opposed to its previous forecast of 3.4 per cent.
The new Office for Budget Responsibility has forecast growth of 2.3 per cent for 2011.
The revised figures reflected both the emergency budget of stringent cuts presented by the Conservative—Liberal government in June, and the announcement that Value Added Tax (VAT) is to go up from 17.5 per cent to 20 per cent from next January.
Mr. King said inflation, which now stands at 3.2 per cent, was likely to prove more stubborn than previously expected. It would remain above the bank’s target of 2 per cent until the end of 2011, he said.
The admission fuelled immediate speculation that a change in key interest rates, which have been at a record low of 0.5 per cent for 17 months, could rise in the near future.
Mr. King said the impact of the 2008 financial crisis would fade only gradually, as credit lending remained tight and consumer confidence low. It would take many years before the situation returned to “anything like normal,” he warned.