THE Bank of England is expected to trim its growth forecasts as fears over the underlying health of the recovery overshadow the economy's recent return to growth.
Governor Sir Mervyn King is expected to indicate a slight contraction in 2012 in the Bank's quarterly inflation report, compared with flat growth predicted three months ago.
Utility bill hikes, higher food prices and volatile oil costs are likely to force the Bank to raise its inflation forecast, although economists still expect it to show the rate sliding below the Government's 2% target later next year.
The UK economy emerged from the longest double-dip recession since the 1950s in the third quarter, between July and September, with 1% growth. But economists warned the figures were distorted by one-off events such as the Queen's Diamond Jubilee and the Olympics, while recent surveys on the services, manufacturing and construction sectors have been weak.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "The Bank is likely to look through the distortions to the GDP performance over the past couple of quarters and focus on the underlying growth performance, which currently looks precarious."
Sir Mervyn is already braced for a choppy year, previously warning that events such as the Olympics and Jubilee will have an impact on the headline figures. The Bank earlier this month decided against injecting further cash into the economy through its quantitative easing programme, holding the total stock at £375 billion.
Many economists still believe the Bank will increase the emergency support by at least another £50 billion, although there have been strong signs that the Bank is considering taking a step back from QE.
Sir Mervyn and his deputy Paul Tucker have raised the temporary nature of QE in recent speeches, while Bank minutes revealed other members had questioned the impact of future doses.
Homeowners will be looking for any hints on the path interest rates might take, with some analysts speculating rates could be cut further to 0.25%. The last inflation report in August suggested households were set for at least three more years of record low interest rates and this is unlikely to alter given the underlying picture of the economy.
A gloomy report from the Bank is likely to pile more pressure on Chancellor George Osborne to soften his harsh austerity measures and move to boost growth in the economy.
© Press Association 2012