BoE: Raising Rates Would Risk Recession

Bank of England governor Sir Mervyn King has said that raising interest rates would send the UK into recession.

Presenting the Bank of England's latest economic forecasts, he also said that the economy is expected to recover "gradually", but that it would "zigzag" this year, dipping in and out of growth.

Output is likely to be volatile this year, especially given the impact of one-off factors such as the additional bank holiday granted for the Queen's Diamond Jubilee.

The report - presented as official figures showed UK unemployment figures rose to 2.67 million up to December - said the outlook for growth was broadly in line with the November forecast, and that it is expected at around 1.2% in 2012.

But the Bank of England governor warned that the biggest risk to recovery was the eurozone crisis. He said he does not think anyone can be fully prepared in the event of a Greek default.

The Bank of England also said that potential disruptions to supply of oil - for example through Iran's threats to close the Strait of Hormuz, a vital trade route - would pose risks to its inflation forecast.

The headline rate of inflation dropped to its lowest level since November 2010, in a sign that the pressure on cash-strapped households has continued to ease.

The consumer prices index (CPI) rate fell to 3.6% on an annual basis in January, from 4.2% in December.

The rate is more than a percentage point away from the Government's 2% target.

But Sir Mervyn said he thinks inflation may drop to the 2% target in the final three months of 2012, before falling to as low as 1.5% in 2013.