Bank slashes growth forecast to zero

Governor Sir Mervyn King is expected to indicate no growth for 2012 in the Bank’s quarterly inflation report, compared with 0.8% predicted three months ago and 2% a year ago.

As the sluggish economy weighs on prices, inflation forecasts are likely to be cut as well, with the consumer price index dipping below the Government’s 2% target by the end of the year.

The UK economy contracted by a greater-than-expected 0.7% between April and June, meaning the double-dip recession is the longest since the 1950s, after the additional bank holiday for the Queen’s Diamond Jubilee hit output.

Sir Mervyn is already braced for a choppy year, with events such as the Olympics expected to provide a slight bounceback, but nevertheless economists predict a bleak outlook from the central bank.

Howard Archer, chief UK and European economist at IHS Global Insight, said the Bank will “likely acknowledge that the economy has taken a significant turn for the worse and currently faces a worrying and uncertain outlook”.

The Bank last month injected a further £50 billion into the economy through its quantitative easing programme, bringing the total stock to £375 billion.

But the outlook has darkened since the Bank’s move as dire construction and manufacturing output drove the biggest drop in GDP since the height of the financial crisis three years ago.

Meanwhile, in the eurozone, borrowing costs in Spain and Italy remain at high levels, close to the so-called bailout territory that drove the likes of Greece and Ireland into taking a bailout from the EU.

Homeowners are in for a boost as the report is expected to show that interest rates will be maintained at their historic low of 0.5%, or close to that, for at least several more months.

But a gloomy report from the Bank is likely to pile more pressure on Chancellor George Osborne to soften his harsh austerity measures and move to boost growth in the economy.

The IMF, led by former French finance minister Christine Lagarde, last month said the Government should ease its fiscal consolidation, which includes spending cuts and tax reforms, if the recovery continues to stall.