Fears that the UK could slip back into recession have been heightened after the Bank of England downgraded its forecast for economic growth.
In its latest Quarterly Inflation Report, the Bank predicted that the economy will grow by around 2.5% in 2011, lower than the estimate of around 3.4% put forward in May's report.
Stating that 'risks to growth remain to the downside', the report said the strength of the recovery was 'likely to be tempered by the continuing fiscal consolidation and the persistence of tight credit conditions'.
The Bank also admitted that inflation could now remain above its 2% target for longer than had been previously expected.
It is thought consumer price index inflation, which stood at 3.2% in June, could stay above the Government's target until the end of next year.
The 2.5% rise in VAT coming into force in January 2011 was the main factor behind the prediction.
The forecast is bad news for savers who have battled to maintain the real value of their savings pots as interest rates have struggled to keep pace with inflation.
Better news for the economy as a whole came with the release of official figures showing a drop in the number of people unemployed.
A 49,000 fall in the amount of people out of work in the three months to June was the largest drop seen in three years.
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