style="text-align: justify">The Bank of England (BOE) on Wednesday lowered its GDP growth forecast and said that inflation will be below its target in two years, citing stringent domestic budget cuts and protracted credit crisis in the euro area.
The UK central bank now sees annual GDP growth of ~2% in two years, compared with a projection of 2.5% in May. It predicts consumer price inflation growth at ~1.6% in the next two years, below its 2% long-term goal.
“The outlook for UK growth remains unusually uncertain," the BOE said today in its quarterly Inflation Report. “The greatest threat to the recovery stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area.”
The British economy shrank by 0.7% in the second quarter of 2012, the most in more than three years. The BOE said that one-off factors exaggerated the weakness, adding that the near-term outlook is still likely to be weak.
"Inflation is a little more likely to be below the target for much of the second half of the forecast period,” the UK central bank said.
UK's inflation declined to 2.4% in June.
The BOE said today that risk to inflation around its target are judged to be broadly balanced by the end of the forecast period. “The near-term outlook is lower than three months ago, reflecting falls in energy prices and some broader based weakness in price pressures,” the BOE said.
The projections today are based on the bond target staying at 375 billion pounds and an interest-rate reduction by the second quarter of 2013.
The UK central bank said that a gentle pickup in the growth of households’ real incomes, combined with the stimulus from the asset-purchase program, and the Funding for Lending Scheme should spur a modest recovery.
However, the BOE cautioned that exports have fallen due to slowing global demand, and that the pound’s appreciation over the past year, particularly against the euro, may hamper exports.
If the gains in the currency were to continue, it could make it harder for British producers to compete in world markets,” the UK central bank said.
Commenting on the slump in second-quarter GDP, the BOE said that erratic factors exaggerated the weakness.
"Much of the contraction in the first half of this year reflects unusually large declines in measured construction output,” the BOE said. “Falls of that magnitude appear out of line with industry surveys and seem unlikely to persist.”
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