The Bank of England has braced the country for weaker growth as rocketing energy bills and tough Government cuts continue to squeeze household spending.
In its quarterly inflation report, the Bank cut growth forecasts for the next two years and warned inflation will fall back later than previously expected in 2013.
The Bank warned energy bills could surge as much as 15% this year, far ahead of its previous expectations, piling pressure on the cost of living and dampening growth.
Despite the uncertain outlook, economists said the report suggested interest rates will increase from 0.5% to 1% by the end of the year.
Bank governor Mervyn King said the soft patch in growth will be temporary but the recovery will hinge on business investment and exports. He warned the squeeze on household budgets may have further to go.
It is the fourth time the Bank has downgraded its growth forecast in the year since the coalition Government was formed.
The report reopened the debate over the severity of Chancellor George Osborne’s austerity measures and the ability of the economy to withstand the cuts, with Shadow Treasury chief secretary Angela Eagle saying: “Cutting too deep and too fast, as this Conservative-led Government is doing, is a vicious circle.”
The Bank downgraded its expectations for gross domestic product in 2011 to around 1.7%, from about 2% in its February report. In 2012, GDP is expected to be around 2.2%, from just under 3%.
The rate of inflation, currently at 4%, is now expected to hit 5% this year and remain above the Government’s 2% target throughout 2012 before falling back – but only if interest rates rise in line with market expectations from the third quarter of 2011.
The gloomier outlook reflected the impact of surging energy prices – such as crude oil in the wake of political unrest in Libya – and the impact disappointing real wages will have on spending.
London Evening Standart