Bank of England cuts 2013 growth forecast amid euro crisis

The FINANCIAL -- The Bank of England cut its forecast for British economic expansion on Wednesday and predicted low growth for the next three years due to the eurozone crisis, tight credit conditions and inflationary pressures.

Gross domestic product (GDP) expansion was predicted to average 1.0 percent in 2013, the central bank said in its latest quarterly report. That compared with the previous forecast of around 2.0 percent which was given in August.

The BoE also warned that economic output would remain below pre-financial crisis levels for at least the next three years, holding underneath its historical average in a "sustained but slow" recovery until mid-2015.

The central bank laid much of the blame at the door of the unresolved sovereign debt crisis in the eurozone, which is Britain's key trading partner.

Adding to the gloom, governor Mervyn King declared that activity could shrink again in the fourth quarter of 2012, having surged by 1.0 percent in the previous three months to escape from a double dip recession.

In reaction to the news, sterling sank in afternoon deals to $1.5840 -- which was the lowest level since September 5. It also hit a near two-week trough against the euro.

"Output grew strongly in the third quarter. Welcome as that is, it is not a reliable guide to the future," King told reporters at a press conference, adding that the London Olympics had skewed the data.

"Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in the fourth quarter as the boost from the Olympics in the summer is reversed -- indeed, output may shrink a little this quarter."

"Despite a resilient labour market, as we saw again in this morning's figures, the economy has barely grown over the past two years.

"That unexpected weakness reflects the impact of the euro area crisis, and its effect on confidence and bank funding costs, and the sharp squeeze on real incomes from higher than expected world energy and food prices."

King told reporters that a slow recovery was in prospect as some of those headwinds abate, supported by lower bank funding costs.

"In the near term, growth is sluggish. Further out, it's likely to pick up gently as households' purchasing power begins to strengthen and credit conditions ease," he added.

"But GDP growth is more likely to be below than above its historical average over the entire forecast period. This subdued recovery reflects a judgement that the global environment will remain unfavourable."

Third-quarter growth turned positive on one-off factors, including the Olympics and rebounding activity after an extra public holiday for Queen Elizabeth II's Diamond Jubilee in the second quarter.

The BoE also forecast that consumer prices index (CPI) annual inflation would fall back towards the government's 2.0-percent target in the second half of 2013, later than previously thought.

In slightly better news on Wednesday, official data showed Britain's unemployment rate had dipped to 7.8 percent in the quarter to the end of September.

Britain sank into the first phase of a double dip recession in 2008 as a result of the devastating global financial crisis that sparked a number of vast banking bailouts.

The economy rebounded in late 2009 but struggled to stage a convincing recovery and fell back into a second downturn in late 2011 as the eurozone crisis loomed large.

Activity has been hit hard also by deficit-slashing austerity measures from the nation's Conservative-Liberal Democrat coalition government.

The BoE has sought to aid the recovery by slashing its key interest rate to a record low of 0.50 percent, where it has stood since March 2009, when it also launched its radical quantitative easing (QE) stimulus policy. As EUbusiness announced, last week, the bank's monetary policy committee decided to pause its QE programme at GBP 375 billion ($604 billion, 467 billion euros) after Britain escaped from recession.

Under QE, the central bank creates cash that is used to purchase assets such as government and corporate bonds in an attempt to boost lending by retail banks, and in turn, economic activity.  FinChannel