Stimulus options left open as Bank of England cuts growth forecast
THE Bank of England cut its forecast for economic growth and said inflation will undershoot its target, suggesting policy makers may need to keep up their £200bn (€227bn) emergency stimulus.
Annual gross domestic product growth will reach about 3.2pc in the second quarter of 2011, compared with about 4pc previously, the central bank predicts.
Inflation will peak at about 3.3pc before falling back below the goal of 2pc.
"The committee judges that while the most likely path for growth is somewhat weaker, some of the downside risks are smaller than in November," the bank said in its quarterly report yesterday. "It is more likely that inflation will be below the target for much of the forecast period, but the risks are broadly balanced by the end."
Bank of England policy makers are weighing the threat of accelerating inflation against the risk of a relapse in growth after the economy barely expanded in the fourth quarter.
Pre-election uncertainty on the prospects for the budget deficit also clouds their forecasts at a time when investor concern on European sovereign debt is gripping financial markets.
The inflation rate jumped by 1 percentage point in December, the most since records began in 1997, to 2.9pc, after oil prices surged and 2008 cuts in sales tax and retail prices were not repeated.
"The risks around the most likely path for inflation are judged to lie on the upside, reflecting the possibility of further increases in commodity prices and the risk that a sustained period of above-target inflation might cause inflation expectations to rise," the bank said.
Britain's economy resumed growth, expanding by 0.1pc in the fourth quarter.
The weakness of the recovery poses a challenge to officials as they consider whether the economy is strong enough to start withdrawing emergency stimulus measures.
The bank reiterated that its forecasts pointed to a "gradual recovery" for the economy.
Analysts said strong manufacturing figures for December were more in line with survey data than the official statistic of tiny growth. Output rose 0.9pc from November, the Office for National Statistics said. Economists had predicted a 0.3pc increase. (Bloomberg)