LONDON, Aug 14 (AFP): The head of the Bank of England (BoE) forecast yesterday that Britain faced increased risk of recession with economic growth set to slow further and inflation expected to spike. "It is bound to be the case there will be a quarter or two of negative growth," BoE governor Mervyn King told a press conference here.
King spoke soon after the central bank's monetary policy committee said in its latest quarterly inflation report that Britain's economy would be "broadly flat" over the next year, before rebounding quickly from the middle of 2009.
The technical definition of a recession is when an economy contracts for two or more quarters in a row.
Gross domestic product (GDP) in Britain grew by 0.2 per cent in the second quarter compared with the first three months of 2008, according to recent official data. This was the slowest pace of economic growth for more than three years.
"The committee's forecasts for GDP growth now envisage the economy broadly stagnating over the next year or so," noted Capital Economics analyst Jonathan Loynes.
"However, there is a clear chance that the economy slows even more sharply than this. Business surveys are already warning of the danger that the economy actually contracts in the second half of the year," Loynes added.
Britain's central bank added Wednesday that inflation was set to rise sharply to around 5.0 per cent this year, before declining rapidly toward the government's target of 2.0 per cent from early 2009.
This would occur, however, only if the BoE decided to keep British interest rates at their current level of 5.0 per cent, the report added.
British annual inflation grew at the fastest pace for 16 years in July as food prices surged, official data revealed Tuesday, scuppering hope of an interest rate cut to spur flagging growth.
According to the the Office of National Statistics, the 12-month figure marked the fastest annual rate since April 1992. It had stood at 3.8 per cent in June.
The statistics office also said that inflation had been fuelled by higher domestic energy prices.
"The British economy is going through a difficult and painful adjustment -- to higher energy and commodity prices, and in banking, credit and housing markets," King told reporters.
"This adjustment to our economy cannot be avoided. And as a result, inflation is rising and growth is slowing."
The BoE had frozen British interest rates at 5.0 per cent last week for the fourth month in a row as it mulled slowing economic growth and high inflation.
The expected decision came as the BoE, in line with major Western central banks, faces a dilemma between cutting short-term rates to boost growth, or lifting them to keep rising inflation in check.
Last Thursday, the European Central Bank (ECB) left its key lending rate at 4.25 per cent as it battled with the twin threats of inflation and recession in the 15-nation Eurozone.
