BoE downgrades growth forecast
The Bank of England today downgraded its growth forecast for the UK and braced households for an interest rate hike as early as the spring.
The Bank said in its latest forecast that growth in 2011 will be weaker than previously estimated but reassured that a double-dip recession was unlikely as growth is set to resume following the shock contraction at the end of 2010.
Its quarterly report confirmed inflation is expected to soar close to 5pc before falling to around the 2pc target in 2012 - but only if interest rates rise in line with market expectations from the second quarter of this year.
The market expects rates to reach 1pc by the end of the year and the report warned that if the Bank took no action - holding rates at an historic low of 0.5pc - inflation would still be above target in two years' time.
But the Bank said that, even if rates rise in line with market expectations, inflation will remain "well above" target for the next year and there are doubts over the timing and how far it will drop back.
Following the publication of the report, Governor Mervyn King said the Bank's Monetary Policy committee believes inflation will fall back next year but added "the extent to which it will do so is uncertain".
The Bank lowered its estimate for growth in 2011 and slightly downgraded its forecast for 2012, following the impact the snow had on GDP output in the final three months of last year, when it unexpectedly fell 0.5pc.
Mr King warned that "the recovery was unlikely to be smooth".
The report added: "The projection for four quarter growth is weaker than in November for much of 2011, following the weak data around the turn of the year."
It said: "But the strength of the recovery is likely to be dampened by the fiscal consolidation and a continuing squeeze on households' purchasing power from the effects of higher commodity prices and a persistent impact of the recession on productivity and hence wages."
Mr King said he could not see "any way out" of the current spike in inflation and cautioned against reading too much into today's projections for interest rates.
He said the path for growth, private spending, export and investments would all have a bearing on inflation over the next two years.
He said: "The (interest rate) decision has not been made until we get to the next meeting, it may be many quarters before we do anything."
Mr King added: "At present the link between Bank rate and its impact on inflation is probably more muted than in normal times."
The Bank has come under fire for failing to keep a lid on soaring inflation, with its credibility called into question yesterday when official figures showed the consumer prices index rising to 4pc in January, from 3.7pc.
Questions have been raised over why the Bank decided to keep interest rates at 0.5pc this month. However, Mr King said "policy is not determined by the current rate of inflation. It has to be determined by a dispassionate judgment of the risks."
Asked if the MPC was committed to hitting the 2pc target, Mr King replied the commitment is "iron clad" and added that "we are not in the business of making futile gestures".