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By Rebecca Clancy | Published Aug 08, 2012

Bank of England slashes UK growth forecast to zero

The Bank of England has slashed the UK’s growth forecast for 2012 to close to zero, due to the continuing crisis in the eurozone.

In its latest Inflation Report, released this morning, the Bank revised its previous estimate of 0.8 per cent of growth in 2012 overall - predicted just three months ago - and said the outlook for UK growth remained “unusually uncertain”.

The Bank also downgraded its medium-term view of growth in the UK, forecasting of 2 per cent in two years’ time, down from its previous estimate of 2.7 per cent in the May report.

The Report stated that the “greatest threat” to the recovery was the risk that an “effective policy response is not implemented sufficiently promptly in the euro area to ensure that the adjustments in the level of debt and competitiveness required by some member countries occur in an orderly manner”.

“Even if an effective set of policies is implemented, the scale of the necessary adjustments points to a sustained period of sluggish euro-area growth and heightened uncertainty,” the Report said.

Inflation was expected to fall back to the Bank’s 2 per cent target level more quickly than was predicted in the previous report, issued in May. The Bank has also forecast that inflation will fall below the target within two years.

Recent data from the Office for National Statistics showed that the Consumer Price Indices measure of inflation had fallen to 2.4 per cent in June.

In a press conference today accompanying the publication of the Inflation Report, Mr King also left the door open for even further monetary stimulus measures from the Bank.

“There are further measures that we can take in the future, including further asset purchases. We’ll look at this each month as we come to it,” he said.

MAM Funds managing director Gervais Williams said the trend of revising down growth expectations would be “with us for some time”.

“There have been a long series of downgrades of world growth and the UK trend is similar,” he said.

“The bottom line is that savers cannot expect to get attractive returns from market indices. All of us in the financial community will need to work a little harder to generate returns in future.”

Vicky Redwood, chief UK economist at Capital Economics, said the “substantial” downward revision of growth forecasts supported the view that further monetary stimulus was likely later in the year.

“Accordingly, the door is clearly open to more stimulus and we still expect both more [quantitative easing] QE and a further interest rate cut in November,” she said.

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