Inflation 'will hit 5% by the end of the year' Bank of England warns

Slow road to recovery: The Bank of England Governor Sir Mervyn King said he expected growth to slow significantly

Slow road to recovery: The Bank of England Governor Sir Mervyn King announcing today that he expected growth to slow significantly

Families were warned yesterday they face a further squeeze on their finances as the Bank of England said inflation will hit five per cent by the end of the year.

The Bank cut its growth forecasts for 2011 from 1.8 per cent to 1.4 per cent and warned that ‘headwinds are becoming stronger by the day’.

There was some consolation for households worried about mortgage costs when Bank Governor Sir Mervyn King said that interest rates are likely to stay at record lows for another two years.

But that is a blow to savers and pensioners who will continue to suffer low returns on their money.

The inflation rate is already above four per cent.

The gloomy outlook came amid another punishing sell-off on global stock markets as panicky investors fretted about recession in the United States and the debt crisis in Europe.

In London the FTSE 100 index sank 157.76 points to a new  13-month low of 5007.16, wiping another £41billion off the value of Britain’s biggest companies. It took losses since the start of the rout nine days ago to £226billion.

Downgrade: The Bank cuts its GDP growth forecast for the UK this year to about 1.5% from 1.8%

Downgrade: The Bank cuts its GDP growth forecast for the UK this year to about 1.5% from 1.8%

Sir Mervyn said the biggest threat to Britain was meltdown in the eurozone and that the economy was always at risk from ‘the unimaginable and the unmentionable’.

He conceded there was a ‘limit’ to what the Bank could do to prevent another recession although he refused to rule out printing more money to add to the £200billion already created through quantitative easing.

But he gave a clear signal that the Monetary Policy Committee will hold interest rates at 0.5 per cent for a long time to support the recovery.

Analysts said rates were unlikely to rise before the middle of 2013, having been at rock bottom levels since the depths of the recession in 2009.

Inflation vs interest rates: Base rate has dived below inflation

The Bank of England believes inflation could hit 5 per cent by the end of the year but does not expect significant changes in the interest rate


Interest rates on personal loans have hit their highest level since records began, the Bank of  England said yesterday.

The average rate is now 12.49 per cent, around 25 times higher than the 0.5 per cent base  rate, according to the Bank’s  Inflation Report.

Marc Gander, co-founder of the Consumer Action Group, said: ‘This is a mess created by the banks – but they are the only ones benefiting from it.’

Meanwhile pressure on family budgets means one in three shoppers has no cash spare after buying food and other essentials.

The figure is the highest ever recorded according to a study by the British Retail Consortium.

Sir Mervyn warned: ‘The mood in the markets has taken a sharp turn for the worse.

The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker.’

The slowdown has sparked fears the Chancellor will miss his goal of eradicating Britain’s structural budget deficit by 2014 unless he authorises deeper cuts.

The Institute for Fiscal Studies warned yesterday that George Osborne will face ‘an incredibly hard choice’ in the autumn.

But in a statement to MPs when Parliament is recalled today, Mr Osborne will insist he is sticking to Plan A.

In Paris, fears are mounting that France could be the next country to lose its AAA credit rating following the U.S. downgrade last week.

Analysts warn it cannot afford to keep bailing out poorer single currency states. French President Nicolas Sarkozy has cut short his holiday and vowed to tackle the nation’s debts.

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