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Bank downgrades UK growth forecast

PUBLISHED: 12:46 13 May 2015 | UPDATED: 12:54 13 May 2015

Mark Carney the Governor of the Bank of England speaks during a press conference for the quarterly inflation report at the Bank of England in the City of London. PRESS ASSOCIATION Photo. Picture date: Wednesday May 13, 2015. The Bank of England has downgraded its forecast for annual UK economic growth for 2015 and the following two years. Policy makers now expect GDP to expand by 2.5% this year, down from 2.9%. It has also cut its forecast for growth next year from 2.9% to 2.6% and for 2017 from 2.7% to 2.4%. See PA story ECONOMY Bank. Photo credit should read: Matt Dunham/PA Wire

Mark Carney the Governor of the Bank of England speaks during a press conference for the quarterly inflation report at the Bank of England in the City of London. PRESS ASSOCIATION Photo. Picture date: Wednesday May 13, 2015. The Bank of England has downgraded its forecast for annual UK economic growth for 2015 and the following two years. Policy makers now expect GDP to expand by 2.5% this year, down from 2.9%. It has also cut its forecast for growth next year from 2.9% to 2.6% and for 2017 from 2.7% to 2.4%. See PA story ECONOMY Bank. Photo credit should read: Matt Dunham/PA Wire

The Bank of England has downgraded its forecast for annual UK economic growth for 2015 and the following two years.

Policy makers now expect GDP to expand by 2.5% this year, down from 2.9%. It has also cut its forecast for growth next year from 2.9% to 2.6% and for 2017 from 2.7% to 2.4%.

The Bank increased its expectations for inflation by the end of this year but sees it as broadly the same as before at the end of its three year forecast period. It also appeared to endorse expectations of an interest rate hike in the middle of next year.

Bank of England Mark Carney said falls in oil and food prices which have driven inflation to zero would be “relatively short-lived”.

He said the rate could still turn negative but was expected to pick up noticeably towards the end of the year as those effects fade.

Inflation is expected to return to its 2% target within two years before rising a little above this.

The Bank also downgraded expectations for wage growth this year from 3.5% to 2.5% and Mr Carney cited the danger of this continuing as a “key risk”.

He warned of “underlying weakness” as the Bank gave a bleaker picture for productivity growth, now expected to improve only modestly in the year ahead before remaining below past average rates.

However, he said consumer confidence was the strongest in over a decade with household spending boosted by lower food and energy prices.

He warned that “persistent headwinds continued to weigh on the UK economy” from factors including the fiscal squeeze.

He said these would mean more gradual increases in interest rates than previously and below average historical levels for some time to come.

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