Britain's economic recovery will be gradual and the extra bank holiday for the Queen's Diamond Jubilee could create a "zig-zag" pattern of growth in 2012, the Bank of England said on Wednesday.
Governor Sir Mervyn King, speaking at the bank's quarterly inflation report, said the UK would recover "gradually" but that the economy was in for a "bumpy ride". However he said it's unlikely the country would fall back into recession.
He predicted that growth would be around 1% in 2012 and that inflation would move to below the government's target of 2% - but warned on "positive and negative quarterly growth rates."
"For much of this year, there is likely to be a zig-zag pattern of positive and negative quarterly growth rates reflecting the additional Bank Holiday for the Queen’s Diamond Jubilee. It will be even harder than usual to interpret the official estimates.
"The outlook for growth is broadly similar to that in November – weakness in the near term is followed by recovery to rates of growth closer to averages by the end of the second year. That recovery is driven by rising real incomes, and a pick up in investment from its current low levels," the governor said.
However he said raising interest rates would send Britain back into recession, adding: "We all want to return to a world with a more normal level of interest rates. But if we were to raise interest rates to such a level now, that would serve only to turn a gradual recovery into a recession, put more people out of work, and cut the value of assets on which many savers depend."
Richard Driver, Currency Analyst for Caxton FX said the Bank of England's report was "good news" for consumers.
"The BoE’s downward revision to UK growth projections is not a huge surprise, regardless of the punchier figures we have seen at the start of this year. The central bank’s expectations for near-term growth remain suppressed and won’t do anything for domestic economic sentiment…
"It is eminently clear from Mervyn King’s press conference that he is scared stiff by negative developments on the continent."