The Bank of England today lowered its expectations for Britain's economic growth this year, but added activity was likely to pick up over the following two years.
Delivering the key quarterly Inflation Report, Governor Mervyn King said the bank was cutting its 2005 forecast from 2.5 per cent to around 2 per cent, before rising above 3 per cent in 2007 - a level of growth that may reduce the chances of further interest rate cuts following a quarter point reduction to 4.5 per cent last week.
The bank also predicted inflation would rise above its two per cent target, driven by increased oil prices. In the report, the BoE said the consumer price measure of inflation was likely to move above the two per cent target and then dip as oil price pressures wane. CPI was then seen rising above the target once more to be above it in two years time.
The lower growth target had been widely predicted by analysts after recent figures showed the economy grew at its slowest rate for more than a decade. Nevertheless, Mr King added that the recent slowdown had been "modest" by the standards of the past.
The report expressed surprise at the extent of the recent slow down in consumer spending. However, the bank said it was possible that the housing market slowdown and higher interest rates had had a greater impact than expected.
It added: "The committee expects moderate growth in consumers' expenditure in the near term, though considerable uncertainty surrounds that judgment."
Malcolm Barr, UK economist at JP Morgan, said the inflation forecasts from the Bank were broadly in line with expectations.