Real threat of recession warns Bank of England

Delivering the Bank of England’s August Inflation Report, Mervyn King said the next year is to be a difficult one, with inflation high and output broadly flat.

The Bank does not expect the UK economy to grow at all over the next 12 months after Mr King, Governor of the Bank of England, added that the British economy is going through a difficult and painful adjustment and has not ruled out a recession.

Earlier this week, it was revealed that the UK’s annual rate of inflation has surged to a record high of 4.4% in July and is at its highest level since current records began in 1997.

However, Mr King is now warning that inflation could reach 5% which will make it hard for the Bank to cut interest rates in the short-term.

However, he added that the rise in inflation will be temporary and said we will come through it, inflation will come down and a pattern of normal growth will resume.

However, he believes that the slowing economy will ultimately curb inflationary pressures.

Since the Bank’s last inflation report in May, the economic picture has deteriorated. It forecast growth to about 1% mark at the end of this year.

The Bank is also forecasting that consumer spending and house prices will weaken, primarily due to the ongoing tighter credit conditions.

Commenting on the report, Jonathan Loynes, chief European economist at Capital Economics, said a fall in interest rates will eventually be seen once inflation pressures ease.

The gloomy assessment had an impact on the pound, which declined to a 22-month low against the dollar.

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