The Bank of England cut its forecast for economic growth over the next two years, saying Wednesday the financial crisis affected Britain more than first thought.
The bank's Monetary Policy Committee said in a statement global demand growth has slowed, and output in Britain has been "broadly flat" for the past two years.
"Although output is estimated to have fallen for three consecutive quarters, the scale of that contraction was amplified by a number of erratic factors and so probably exaggerates the weakness of underlying activity," the bank said. "Even so, underlying demand growth is likely to remain muted in the near term."
Given the financial situation, the monetary committee decided it was appropriate to maintain the bank rate at 0.5 percent and the size of the asset purchase program at 375 billion pounds (about $587 billion) to meet the 2 percent consumer price index inflation target.
Inflation was at 2.4 percent in June. The committee said the inflation rate was slightly more likely to be below rather than above the 2 percent target.
"Credit growth remained moribund," the committee said. "Lending conditions facing UK households and companies tightened in [during the second quarter] and had been expected to deteriorate further in [the third quarter] in the face of increased funding costs for banks."
The bank said exports fell during the four quarters to the first quarter in 2012, reflecting a broad-based slowing of global demand growth and Britain's lower share of world trade.
"At home, output is estimated to have contracted for three consecutive quarters, such that the level of output in 2012 Q2 is estimated to be lower than in the middle of 2010," the bank said. "But the scale of that fall probably exaggerates the weakness of underlying demand growth. Much of the contraction in the first half of this year reflects unusually large declines in measured construction output."
Such a drop seems out of line with industry surveys and seems unlikely to continue, the bank said.
The level of output "is not likely to surpass its pre-crisis level until 2014," the bank said. "Much of this sustained weakness in output appears to have been associated with slow growth in potential supply."
"The outlook for UK growth remains unusually uncertain," the bank said. "The greatest threat to the recovery stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area to ensure that the adjustments in the level of debt and competitiveness required by some member countries occur in an orderly manner."