Bank of England cuts growth forecast

[August 11, 2010]  LONDON (AP) -- The Bank of England has lowered its economic growth forecast for next year, warning that Britain faces a "choppy recovery" amid great uncertainty about the outlook for the United States and the eurozone.

The downbeat assessment from the British central bank on Wednesday echoes warnings from the U.S. Federal Reserve that the pace of economic recovery is slowing -- raising fears about a double dip recession.

"It will take many years before bank balance sheets and fiscal positions return to anything like normal," said Governor Mervyn King, after unveiling the Bank of England's latest quarterly report.

The British central bank now expects gross domestic product growth to peak at around 3 percent annually -- down from its forecast in May of 3.4 percent growth -- and predicts that inflation will stay above its 2 percent target until the end of 2011.

But it adds that inflation is likely to fall below that target in 2012, to around 1.5 percent, even if the bank raised interest rates from their current record low, signaling that the British economy may need more emergency stimulus.

The change in outlook from just a few months ago reflects a weakening in consumer confidence, the persistence of tight credit conditions and faster fiscal consolidation via government spending cuts.

Britain has experienced a change in government since the bank's last quarterly report, with the new Conservative-led coalition making it a priority to lower the country's massive budget deficit via spending constraints. Its plans to raise consumer sales tax from the start of next year are a key factor in the revision of the forecasts.

"The overall outlook is weaker than that presented in the May inflation report," said King. "Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated, and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area."

[Associated Press; By JANE WARDELL]

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