GDP growth could fall to 1.5% by the end of 2008 according to the Bank of England's latest inflation report.
The report also estimates inflation will rise to around 3% by the middle of 2008 before falling back to target levels in 2009, indicating the Bank is unlikely to make further interest rate cuts in the near future.
The Bank of England’s Governor, Mervyn King, says the Monetary Policy Committee’s major aim is to bring inflation back within its 2% target in the medium term, but he admits the Bank faces a difficult balancing act.
“The adjustment we are experiencing is part of a longrun rebalancing of the world economy that, in the United Kingdom, will mean some shift in total demand, away from spending and importing, towards exporting,” explains King
“That process will be supported by the 6% fall in sterling’s effective exchange rate over the past three months, which will help to offset the weaker outlook for the world economy. But the fall in sterling will also put upward pressure on import prices and moderate the growth of real disposable incomes.”
The Bank expects GDP to fall sharply in 2008 as consumer spending is dampened by higher personal savings rates and rising energy and import prices.
As lower interest rates begin to filter through to consumers, growth is expected to recover, and the report estimates GDP will be between 2% and 3% by the end of 2009.
However, the Bank is uncertain about the full impact of recent market developments, including the credit crunch, and overall projections show GDP could fall anywhere between 0% and 3% by the end of the year.
The report says inflation could also rise substantially, with pessimistic projections reaching almost 4% by the summer, while the most optimistic estimate is still above the 2% target.
Inflation has become a major concern of both the Government and the Bank of England, and the latest figures suggest a further cut in interest rates is unlikely to happen in the next few months.
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