By politics.co.uk staff
Bank of England governor Mervyn King has lowered Britain's economic growth forecast and raised expectations of higher inflation.
The Bank's August inflation report reflected the decision to raise VAT to 20% next year - one of the most controversial measures in George Osborne's emergency Budget.
"The forthcoming increase in the standard rate of VAT to 20% will add to inflation throughout 2011," the Bank warned, suggesting inflation would remain above the two per cent target longer than previously expected.
It said growth in 2011 would be around 2.5%, a significant reduction on the forecast of roughly 3.4% previously predicted.
"The most likely outcome for GDP growth is lower than in the May report, reflecting the softening in business and consumer confidence, the faster pace of fiscal consolidation and a slower improvement in market conditions," the Bank added in its report.
The Office of Budget Responsibility (OBR) had predicted growth of 2.3% in 2011.