The Bank now estimates that the economy will grow 2.5% in 2011 due to various downside risks and tighter credit conditions.
The downgrade was published this morning in the Bank’s quarterly inflation report, which also revealed that inflation is now expected to remain above the 2% target until the end of 2011 – significantly longer than projected in May.
CPI inflation over the past quarter remained well above the 2% target, elevated by temporary effects stemming from higher oil prices, the restoration of the standard rate of VAT to 17.5% and the past depreciation of sterling.
The report said the forthcoming increase in the standard rate of VAT to 20% in January will add to inflation throughout 2011.
GDP was provisionally estimated to have risen by 1.1% in 2010 Q2 and Mervyn King, governor of the Bank of England, said the monetary policy committee judged that the recovery is likely to continue.
He added: “The most likely outcome for GDP growth is lower than in the May Report, reflecting the softening in business and consumer confidence, the faster pace of fiscal consolidation and a slower improvement in credit conditions.
“It will take many years before bank balance sheets and fiscal positions return to anything like normal. In the meantime they will act as headwinds to the recovery. But continuing monetary stimulus and the earlier depreciation of sterling will act as tailwinds.
“Looking ahead, the UK economy is facing a major rebalancing away from private and public consumption and towards net exports. Achieving that rebalancing, while confronting those headwinds, is likely to mean a choppy recovery.”
