By KUNA
London : The Bank of England (Britains Central Bank) said Wednesday it faces a “difficult balancing act” as the UK economy experiences slower growth and the risk of accelerating inflation.
In a new report, the Bank predicted that growth would slow sharply to less than two percent by the end of 2008, from about three percent at present.
But the Bank also said it expects inflation to remain above the British Government’s target of two percent, and forecast it could rise as high as three percent.
That could mean fewer interest rate cuts than financial markets expect, economists said.
Governor Mervyn King said “It is the outlook for inflation, in the medium term” that the central bank’s Monetary Policy Committee will remain focused on.
He added that it was likely that the rate of inflation would hit three percent by the middle of this year, which would require him to write a letter of explanation to the British Government.
The comments come amid increasing signs that problems in global financial markets, a strong pound, and earlier increases in the interest rates are creating problems for the UK economy, the economists added.
The Bank of England cut UK interest rates last week to 5.25 percent from 5.
5 percent in an attempt to prevent a major slowdown in the economy.
Many economists have said they expect interest rates to fall as low as 4.5 percent by the end of 2008, though that will be difficult to achieve if inflation does not come down from its current levels.
Last month’s consumer prices index inflation figure rose to 2.2 percent, up from 2.1 percent last December, the highest rate since last June.