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Inflation hits zero as BoE shaves growth forecasts

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Forecasts for growth in the UK have been lowered by the Bank of England in its latest inflation report.

The Bank says inflation hit zero in March, as previously forecast, driven by falls in energy and food prices.

However, the Bank has made minor reductions in forecasts for growth in gross domestic product for the next three years.

2015 is now expected to see maximum growth of 2.6 per cent in GDP, down from 2.9 per cent in the previous inflation report, while the forecast for 2016 also falls from 2.9 per cent to 2.6 per cent.

Similarly, the 2017 forecast has been reduced from 2.7 per cent to a maximum of 2.5 per cent.

The performance would put GDP growth at matching or just below four-year averages.

The Bank attributed the revision to revised outlooks for housing investment and productivity.

BoE Governor Mark Carney says: “Productivity is projected to grow only modestly in the year ahead, before returning towards, but remaining below, past average growth rates.

“That recovery reflects a combination of factors. They include the lessening of compositional effects, a pick-up in the reallocation of resources to new and more dynamic firms, and the effects of the investment recovery coming through.”

With inflation more than 1 per cent away from the Bank’s 2 per cent target, Carney wrote to Chancellor George Osborne to explain moves to bring inflation back into line.

It marks the second consecutive quarter in which Carney has had to write to Osborne, and the Governor says he will likely continue to address the Chancellor in the coming months.

Carney adds: “The economy is growing, unemployment is falling and earnings growth has improved since the middle of last year.

“Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households real take-home pay. In 2015 real disposable income is expected to rise more strongly than in any year since 2007.”

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