Investors will be bracing themselves for more tough times after the Bank of England announced today that it will be downgrading its growth forecast.

It now forecasts growth in the UK economy of 2.5 per cent in 2011, down from its previous estimate of 3.4 per cent and inflation is expected to remain high well into 2011.

Bank of England governor Mervyn King delivered his forecast today and warned that Britain is facing a ‘choppy’ recovery.

He said: “Banks are not being awkward or bloody minded in their attitude, they are facing higher costs of funding… it is not a question of blaming people, this is a direct consequence of the financial crisis that occurred.”

The news weighed heavy on the markets overnight with the FTSE 100 1.4 per cent down and sterling falling to a one week low against the dollar.

Despite recent figures suggesting that the UK economy was coming out of recession he Bank’s report said that confidence had fallen since May, when the growth forecast was upgraded.

“It will take many years before bank balance sheets and fiscal positions return to anything like normal.

“That is clearly a significant improvement upon last year, and somewhat stronger than expected in May and the tailwinds will continue to support growth.

“But there are clearly risks: business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated, and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area.”

The downgrading follows warnings from the U.S. Federal Reserve that the pace of economic recovery is slowing – raising fears about a double dip recession.

© Fair Investment Company Ltd