By Edmund Conway and Angela Monaghan Last Updated: 12:01PM BST 14 May 2009  Mervyn King, governor of the Bank of England, cut his growth forecast and declared that there is as much chance that the economy will still be shrinking this time next year, as there is of it growing.  In its closely-watched Inflation Report, the Bank also appeared to rule out raising interest rates from their current near-zero level for the foreseeable future, indicating that economists expecting it to yank up the cost of borrowing before the end of the year had got ahead of themselves.  The comments caused both the pound and gilt yields to tumble as traders digested the fact that the Bank has no immediate plans to take its foot off the economic accelerator pedal and tighten policy. Sterling dropped by more than a cent against the dollar to $1.5159, and by just under a cent against the euro to €1.1143.  The Bank cut its growth forecast for this year to around -4pc, well below the 3.5pc contraction the Treasury projected in the Budget last month, In comments which will further embarrass the Chancellor, Mr King said that the recovery was likely to be "slow and protracted".  This downbeat view is in stark contrast to the Treasury's own forecasts, which imply that the economy will bounce back to above-trend growth of 3.5pc within two years.  Instead, Mr King said: "The economy will eventually heal but the process may be slow. This is not like the typical business cycle in the post-war period... Even if there is some recovery in output over the next six to nine months, we don't know how sustainable that will prove to be."  He added that there is as much chance that the economy is shrinking midway through next year as there is of it growing.  Shadow Chancellor George Osborne said: "It is a further blow to the credibility of the Chancellor and the honesty of the Budget. The model of economic growth is fundamentally broken and we cannot have a sustainable recovery until we have a Government that understands that."  The Bank expects inflation on the consumer prices measure to fall to around 0.4pc in the fourth quarter of this year, before rebounding at the turn of the year, reflecting the weak pound and reversal of the VAT cut. However, the projections also deemed there was less risk of deflation than the Bank forecast in February.  Mr King said it was "much too early" to assess the impact of its quantitative easing programme but pledged to be ready for an exit strategy as soon as the economy starts growing again.  However, economists said the Bank still need to clarify to what degree this involves raising rates or selling gilts.  Some said the forecasts indicated that the Bank may spend more than the currently-pledged £125bn on Government and corporate bonds, with David Page of Investec saying the Bank may raise the amount given over to so-called quantitative easing to the Treasury-consigned ceiling of £150bn.  Mr King also issued a warning shot to Chancellor Alistair Darling on the size of the Budget deficit, saying: "There is no doubt that we will need to move back to a path for fiscal sustainability, that is very important."
The Bank of England has thrown cold water over hopes that the green shoots of    economic recovery have sprung.