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BoE to lower UK growth forecast

Monday, February 08 16:15:39

The Bank of England looks set to leave the door open to further monetary easing and admit the recovery may be weaker than it had hoped when it publishes new quarterly forecasts on Wednesday.

In November, the central bank's modal growth projections suggested annual growth of 2.2 percent in 2010, rising to an even punchier 4.1 percent in 2011.

However, these forecasts did not fully account for a fiscal squeeze that now looks inevitable, and 14 of 19 economists polled by Reuters expect the BoE to revise its 2010 GDP forecast lower. Britain's central bank paused its pro-growth quantitative easing programme last week, as expected, citing the prospect of a "gradual recovery". But it was at pains to point out that the halt was not necessarily definitive and the programme would be restarted if needed.

It also re-iterated its belief that inflation, which surged to 2.9 percent in December and looks set to go even higher, would fall back below its 2 percent target in due course.

"While we believe this month's pause marks the end of the QE programme, the risk of a double-dip in economic activity means that we can't fully write off the chance of further stimulus just yet," said George Buckley, UK economist at Deutsche Bank.

Key to the market's reaction will not be the BoE's near-term inflation forecasts, which look certain to be revised higher, but where it thinks inflation will be in two years' time.

In November, the BoE sparked a gilt market rally by forecasting inflation would be 1.6 percent in two years if monetary policy were tightened in line with market expectations -- well below its 2 percent target. (C ) Reuters