Britain's growth outlook has darkened and interest rates are unlikely to rise any time soon, the Bank of England said, reinforcing the view that rates will stay at 0.5 per cent for another year.
Minutes to the Bank's July meeting published on Wednesday acknowledged that the economy's soft patch "would persist for longer than previously thought."
While there was no explicit mention of the possibility of more quantitative easing, the minutes stressed that the bank could change monetary policy in either direction, depending on how risks evolved.
"The discussions over the economy struck a noticeably downbeat tone," said Philip Shaw at Investec. "Our guess is that this assessment will feed into next month's quarterly inflation report, which could lead to a downgrading of the GDP forecasts."
Britain's economy slammed into reverse at the end of last year and weak economic data have raised fears that GDP may have contracted again in the second quarter. Many economists expect GDP growth over 2011 as a whole will be no better than 1 per cent, little more than half the 1.7 per cent forecast by the government's fiscal watchdog in March and the 1.8 per cent forecast by the Bank in May.
The Bank, whose GDP forecasts have repeatedly proved too optimistic in recent years, admitted that underlying growth in the second quarter was likely to be "modest" and the outlook for the third quarter had darkened.
"Recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term," it noted.
Interest rates have stood at 0.5 per cent for more than two years – already the longest period of interest rate inertia since the Second World War.
The Bank's monetary policy committee voted 7-2 to keep rates unchanged, as it did in June. The voting pattern was also as expected, with Bank chief economist Spencer Dale and external member Martin Weale voting to raise rates and arch-dove Adam Posen repeating his call for more asset purchases.
The Bank bought £200-billion of financial assets – mostly government bonds – with newly created money between March, 2009, and February, 2010, in an attempt to steer the economy out of recession.
Inflation has been running at more than double the Bank's 2 per cent inflation target for months, but eased unexpectedly in June.
Policy makers agreed that higher food and utility prices meant inflation was likely to peak higher and sooner than previously thought, but a majority remained confident that it would fall back to target over the coming year.
The Bank said there were substantial risks of both overshooting and undershooting that target on a medium-term view. Mr. Dale and Mr. Weale argued that a prolonged period of above-target inflation could alter consumer behaviour and fuel a wage-price spiral.
While there has so far been little sign of that so far – wage growth remains subdued and a Citi/Yougov poll showed inflation expectations fell this month – the minutes said puzzling productivity data meant it was unclear how much comfort could be drawn.
On the downside, the minutes pointed to the risk of a prolonged period of economic weakness and an escalation of the euro zone debt crisis which could further raise banks' funding costs.
"If it were to become clear that one of those risks had crystallized – and the medium-term outlook for inflation had deviated materially from the target in either one direction or the other – the committee would respond by changing the stance of monetary policy," it said.