The Bank of England has downgraded its growth forecast for 2011 on a combination of waning global growth and sluggish domestic demand, and indicated that interest rates will be staying low for a while to come, to the likely relief of homeowners and businesses.
The Bank said Wednesday in its quarterly inflation report that it now predicted growth of 1.4 percent this year, down from the previous forecast of 1.8 percent. It said it would rise to an annual rate of around 2.7 percent in two years time.
"There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang," Bank governor Mervyn King said. "And these headwinds are becoming stronger by the day."
In addition, the Bank said inflation in Britain has a "good chance" of hitting 5 percent this year as higher utility bills feed through but that it will likely fall back sharply next year.
Though inflation is well above the Bank's 2 percent target, rate-setters have kept the main interest rate unchanged at the record low of 0.5 percent as economic growth remains subdued, especially at a time when the government is enacting big austerity measures.
The Bank warned in its report that "the squeeze in households real incomes is likely to continue to weigh on domestic demand."
King said the biggest risks for the world economy are coming from the eurozone, which is grappling with a severe debt crisis that has already seen three countries bailed out and has recently threatened Italy and Spain.
He conceded that the Bank has room to ease monetary policy further, including expanding its asset purchase program. On Tuesday, the Federal Reserve said it would also consider a further monetary stimulus if the economy continued to be weak.
The bank has already undertaken a 200 billion pound asset purchase program to boost the money supply _ so-called quantitative easing, or QE _ after running out of room to maneuver on rates once the benchmark rate had been reduced to 0.5 percent in March 2009 to counter the effects of the financial crisis and the ensuing recession.
"Augusts Bank of England Inflation Report echoed yesterdays message from the Fed that interest rates are likely to stay very low for a long time yet," said Vicky Redwood, senior U.K. economist at Capital Economics.
"We still think that keeping interest rates low wont be enough to generate a strong recovery and that more QE will be necessary," she added.
King dismissed suggestions by reporters at a press conference that the riots that have spread across Britain in the last week were triggered by youth unemployment and public sector job cuts, saying that the private sector has created four times more jobs in the past year than have been shed by the public sector.