Bank Of England Downgrades UK Growth Forecast

The Bank of England has downgraded its growth forecast for the UK economy next year to around 1%, blaming a worse than predicted impact from the financial crisis.

The bank now believes output will remain below pre-financial crisis levels for the next three years and may even shrink in the final quarter of this year while inflation may not now come back to its 2% target until the second half of 2013.

Its governor, Sir Mervyn King, announced the figures at the release of the bank's quarterly inflation report.

He admitted the UK was facing an "unappealing" combination of inflation and growth in the short term.

Only on Tuesday was it confirmed that the Consumer Prices Index measure of inflation had risen sharply from 2.2% in September to an annual rate of 2.7% last month.

The factors behind the increase - such as bad weather hitting crops and rises in tuition fees - are outside the bank's control.

Because economic growth remains weak, the bank is unable to raise the base rate of interest to control inflation but Sir Mervyn confirmed that the bank's Monetary Policy Committee had not given up on Asset Purchases - also known as Quantitative Easing (QE) - to help boost money supply despite the inflationary pressures the policy adds.

At the MPC's last meeting it decided not to boost QE beyond its current total of £375bn as it had only just been confirmed that the UK economy had exited the longest double-dip recession since the Second World War.

Today, Sir Mervyn explained that the committee decided not to extend QE further in November because the Treasury was starting to take in the approximate total of £37bn in excess cash held by the Asset Purchase Facility at the bank.

The move was aimed at making the money - the interest earned from the gilt purchases - work for the country to keep its borrowing down.

The Chancellor has been struggling to meet his targets amid falling tax receipts - brought about by the weaker than expected growth.

Speaking about the reasons behind the more depressed future outlook for the UK economy, Sir Mervyn said: "Output grew strongly in the third quarter. Welcome as that is, it is not a reliable guide to the future.

"Just as growth in the second quarter was depressed by one-off factors and gave a misleadingly weak picture of the economy, so growth in the third quarter has been boosted by one-off factors and gives an overly optimistic impression of the underlying trend.

"Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in the fourth quarter as the boost from the Olympics in the summer is reversed - indeed output may shrink a little this quarter."

Sir Mervyn said it remained the MPC's view that the biggest threat to the UK economy was from the eurozone debt crisis.