By Marcus Leach
Continued problems in the eurozone have seen the the Bank of England cut its growth forecast for this year from 1.2% to 0.8%.
The eurozone crisis, which took a fresh twist this week with news that Greece will be going back to the polls, continues to be a major threat to the UK economy, and as such the Bank has adjusted the growth forecast.
Sir Mervyn King, the Bank's governor, said that there was a very real threat the eurozone crisis could yet have a major impact on the UK and its economy.
"Our biggest trading partner is tearing itself apart without any obvious sign of solution," he said. It would be foolish to think that the UK could navigate these problems "unscathed".
Sir Mervyn also confirmed that the rate of inflation will not fall as quickly as previously thought, and will remain above the government's 2% target "for the next year or so".
The eurozone is not the only contributing factor to the UK economy not returning to pre-financial crisis levels before 2014, with volatile energy and commodity costs, and the squeeze on household earnings all playing a part.
"We don't know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back," Sir Mervyn added.
Graeme Leach, Chief Economist at the Institute of Directors, said the news was a kick in the teeth at a time when moral was already low.
“Talk about kicking an economy when it’s down. On top of the euro crisis and a double-dip recession, the Bank of England is now saying inflation may not fall fast enough to permit more quantitative easing," he said.
"Actually we think the inflation outlook is probably better than the MPC thinks, with the impact of the euro crisis, declining real incomes and weak money supply growth suggesting inflationary pressures may recede later this year and into 2013. After many years of underestimating inflationary pressure let’s hope the MPC is now making the opposite mistake by overestimating it."
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