Gloomy Bank of England to pave way for more bond buys

The Bank of England is seen against a blue sky in the City of London October 6, 2011.

LONDON (Reuters) - The Bank of England is likely to slash its growth and inflation forecasts for 2012 and beyond on Wednesday, fuelling expectations of yet more money-printing later this year to boost the struggling economy.

Britain is languishing back in recession as government spending cuts, the euro zone debt crisis, bad weather and one-off factors including an extended break for the queen's Diamond Jubilee celebrations weigh.

That will all be grist to the mill for central bank governor Mervyn King to extend a recent unbroken run of gloomy economic diagnoses when he presents the BoE's quarterly inflation report to the media - and fields likely questions about whether or when the bank might cut already ultra-low interest rates.

With inflation having fallen faster than expected, markets have also started speculating whether the central bank will announce extra bond purchases before it is done with the current round in November.

The Bank resumed its asset buying last month, launching a four-month, 50-billion-pound programme with newly created money to keep a lid on borrowing costs and pump more cash into the economy.

Since then, figures have shown Britain's recession is deeper than thought, with little sign of a hoped-for bounce in activity in July or a boost from the Olympic Games the country is currently hosting.

The central bank report was likely to flag further easing, Nomura economist Philip Rush said.

"Mervyn King's usual dovish overlay will probably compound expectations that the Monetary Policy Committee remains firmly in fire-fighting mode," he said.

Although most economists polled by Reuters expect the Bank will approve further asset purchases later this year, only a few think the bank might step up the rate of buying during the current programme, even if Wednesday's forecasts could justify it.

Back in May, the Bank forecast an annual rate of growth of 1.2 percent for the last three months of this year, rising to 2.7 percent in two years' time.

Many City economists - as well as the Organisation for Economic Cooperation and Development (OECD) - are now predicting that the economy will shrink over 2012, The Bank is seen cutting its annual growth forecasts for late 2012 and the third quarter of 2014 - the key 'two-year horizon' - to 0.2 percent and 2.4 percent respectively.

Meanwhile, inflation dropped sharply to 2.4 percent in June, well below a forecast the Bank gave in May, and economists expect the central bank to predict it will ease further to 2.1 percent in late 2012 and 1.7 percent in two years' time.

King is also likely to be quizzed about a possible cut in interest rates from their current record low of 0.5 percent.

This is something the Bank has resisted since it last lowered borrowing costs in March 2009, arguing that it would hurt banks' margins and dissuade them from much-needed lending.

But last month it said it would take another look at the idea in a few months' time, once it had taken stock of recent measures to boost credit markets, including a cheap loans scheme for commercial banks run jointly with Britain's finance ministry.

(Reporting by Sven Egenter; Editing by John Stonestreet)