BoE jacks up short-term CPI outlook

British inflation is likely to remain above its 2 percent target for at least another year, while growth will be subdued and vulnerable to the euro zone debt crisis, the Bank of England forecast on Wednesday. The Bank's forecasts represent a much slower fall in inflation than it predicted just three months ago as well as a weaker growth outlook, adding to Britons' gloom as their economy y struggles to recover from the financial crisis. The figures come just after the central bank decided to halt its programme of quantitative easing, reducing support for a country that has slipped back into recession and faces a hefty programme of spending cuts. The central bank said worries about a "disorderly" outcome in the euro zone was already hurting Britain's growth prospects. Most economists do not expect further QE in the immediate future, but this could rapidly change if the conditions in continental Europe deteriorate sharply. "The prospects for UK growth remain unusually uncertain. The single biggest threat to the recovery stems from the challenges within the euro area," the Bank said. Britain's economy suffered its biggest contraction since the 1930s in the wake of the 2008 financial crisis, and had recovered less than half the output lost before it slipped back into recession at the end of 2011. This had a knock-on effect on prospects for the rest of 2012 and the Bank said total GDP would not get back to its pre-crisis level before 2014. "The projected distribution for growth is lower ... reflecting weaker growth around the start of this year, a higher near-term outlook for inflation and a more gradual pick-up in productivity growth," the Bank said. The Bank said growth hinged on stronger household real income growth as inflation fell. Weaker productivity than previously assumed was a major reason for the Bank having to revise up its short-term inflation forecasts, which had previously shown inflation returning to target by the end of this year. "The near-term outlook is judged to be somewhat higher than expected 3 months ago, with inflation now likely to remain above the 2 percent target for the next year or so," it said. In two years time, inflation is forecast to be around 1.6 percent, compared to 1.8 percent in its February forecast. At this point, annual growth will have recovered t o around 2.7 percent, about 0.3 percentage points lower than previously forecast. As well as high inflation, there will also be headwinds to growth from tight credit and public spending cuts, the Bank said. The Conservative-led coalition is part-way through a 5-year austerity programme which it is finding harder to defend as growth in Britain and the euro zone falters. The Bank restarted its programme of quantitative easing asset purchases in October last year, and has since bought 125 billion pounds of gilts, taking the overall total to 325 billion pounds. Inflation hit a 3-year peak of 5.2 percent in September last year, and its steady fall since then was interrupted in March, when it unexpectedly rose to 3.5 percent. Inflation has not been below the Bank's 2 percent target since November 2009. In February, the Bank forecast that inflation would fall below 2 percent by the end of this year, but a spike in oil prices and concerns about whether slack in the economy is pushing down prices have caused many economists to doubt this.