Bank of England cuts growth forecasts, warns on euro crisis

(LONDON) - The Bank of England on Wednesday cut its forecast for British growth and warned that the eurozone debt crisis was the biggest threat to recovery, even if a credible solution is found.

Gross domestic product (GDP) was predicted to grow by just under 1.0 percent this year, down from the central bank's previous forecast of just over 1.0 percent, the Bank of England (BoE) said in a quarterly report.

It also slashed the 2013 growth estimate to 2.0 percent, down from previous guidance for 3.0-percent expansion. Annual inflation was forecast to remain stubbornly above the central bank's 2.0-percent target until mid-2013.

"The prospects for UK growth remain unusually uncertain," the BoE said in the report.

"The single biggest threat to the recovery stems from the challenges within the euro area, in particular the need to reduce the indebtedness and improve the competitiveness of some member countries."

It added: "Even if a credible and effective set of policies is successfully implemented, the scale of the necessary adjustments suggests that a prolonged period of sluggish growth and heightened uncertainty is likely.

"A failure to implement such policies could have severe implications for the UK economy."

The BoE said that its rate-setting Monetary Policy Committee (MPC) could not predict a worse-case scenario for the ongoing sovereign debt crisis in the eurozone, which is Britain's main trading partner.

"As was the case in past reports, the MPC sees no meaningful way to quantify the size and likelihood of the most extreme possibilities associated with developments in the euro area."

The central bank added that it was still working on contingency plans for the potential break-up of the eurozone.

"Contingency plans are being discussed and have been for some time," King told reporters at a central London press conference.

He did not elaborate but added that the plans were being discussed by the BoE, the Treasury and the Financial Services Authority watchdog.

The outlook remained highly uncertain as a result of storm clouds from the eurozone crisis, King added.

"We are navigating through turbulent waters, with the risk of a storm heading our way from the continent... We don't know when the storm clouds will move away."

The gloomy news from the Bank of England was only partly offset by upbeat official data suggesting that the labour market was improving.

The number of Britons claiming jobless benefits sank unexpectedly in April and by the largest amount in nearly two years, data showed Wednesday.

The so-called claimant count of people registered for unemployment benefits fell by 13,700 last month to reach 1.59 million, the Office for National Statistics said in a statement.

That was the biggest drop since July 2010 and confounded market expectations for a gain of 4,500 people, according to analysts polled by Dow Jones Newswires. It was also the second monthly decline in a row.

The number of unemployed people dropped by 45,000 in the three months to the end of March to reach 2.63 million.

Despite the positive data, analysts said the unemployment picture was set to darken after Britain returned to recession.

Recent data showed the British economy shrank 0.2 percent in the first quarter, after a 0.3-percent contraction in fourth quarter of 2011, hit by fallout from the eurozone crisis.

That placed Britain back in recession, which is defined as two successive quarters of contraction.

Markets are focused on mounting speculation that debt-plagued Greece could exit the eurozone bloc, after an inconclusive poll left the member nation in political limbo and forced Athens to call another election.

"UK unemployment figures have been largely overlooked as attention is all on the developments within Europe," said analyst Phil McHugh at foreign exchange firm Currencies Direct.

"In the current climate, small changes in UK employment data play second-fiddle to the unchartered prospect of Greece exiting the euro."

British Prime Minister David Cameron has meanwhile warned that eurozone leaders needed to sort out their debt problems soon or risk the collapse of the single currency as they grapple with the crisis in Greece.