The Bank of England slashed its 2012 growth forecasts for the UK economy, raised its near-term inflation outlook and issued a warning about the potential economic damage of the Eurozone crisis. In the Bank’s quarterly Inflation Report the bank said “Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank funding costs and confidence.” The Bank’s Monetary Policy Committee lowered its estimate of economic growth over this year from 1.2% to 0.8% and the also forecasted that consumer prices inflation will remain well above the Bank’s 2% target until mid 2013. However, they lowered their estimate of the rate of inflation at the end of its two-year horizon period to 1.6% which leaves the door open for more monetary stimulus to assist the economy in the coming months if it is deemed necessary.

Sir Mervyn King, the Bank’s Governor, admitted that the outlook for the UK economy was worse than previously though. However, he repeated his view that falling inflation would alleviate the squeeze on incomes later this year and boost consumer spending. He said, “The big picture remains one in which the economy gradually recovers.” King also warned that the uncertainty created by the situation in Europe would continue to hinder the UK recover by weakening the banking sector. "Underlying concerns about balance sheets, especially in the financial sector with its exposure to the euro area, mean that the path of recovery is likely to be slow and uncertain" he said.