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Growth forecasts cut over two years

Households look set for three more years of record low interest rates after the Bank of England cut its growth forecasts for this year and next.

In its quarterly inflation report, the Bank's most likely scenario for this year was for flat output, compared with 0.8% in its last estimate in May, as the threat of the eurozone and tight lending conditions drag on the economy.

The assumptions are based on market expectations of interest rates falling next year and not rising beyond current levels of 0.5% until the middle of 2015 - keeping the pressure off borrowers but prolonging misery for savers.

Most economists agreed the report paved the way for further emergency support measures, although the Governor played down suggestions that a rate cut was likely.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We certainly would not rule out a future trimming of interest rates from 0.5% to 0.25%, but we believe it is more likely that they will stay at 0.5% through until at least late-2014."

The Bank also slightly lowered its forecast for 2013 to around 1.9% from just over 2% in its May estimate, while 2% growth is predicted for 2014.

Presenting the gloomy report, Sir Mervyn said: "As I have said many times, the recovery and rebalancing of our economy will be a long, slow process."

Sir Mervyn offered some hope as he said the underlying picture in the last three quarters - Britain's longest double-dip recession since the 1950s - was not as bad as headline figures suggested and reassured that the economy was "slowly healing".

Looking ahead, Monetary Policy Committee member Spencer Dale said the Olympics should have a small positive contribution to the economy in the third quarter between July and September. He said the lift would come from ticket sales and TV rights, while extra spending from tourism would be offset by travel disruption and Britons leaving the UK for holiday.

Rachel Reeves MP, Labour's shadow chief secretary to the Treasury, said: "With growth forecasts slashed yet again, not just this year but in future years too, it is clear that we cannot go on with the same failing plan from this Government. The Chancellor's policies aren't only causing short-term pain, but long-term damage to our economy too.

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