Economic growth could fall below 2 per cent later this year, the Bank of England warned today, suggesting that tighter credit conditions and weaker growth in personal incomes would "bear down on domestic demand".

GDP, which measures economic growth, was 3.1 per cent in the last quarter of 2007. The Bank's most conservative estimates show GDP dipping below 0 per cent next year, although only for a short time.

A recession is defined as two consecutive quarters of negative growth. Mervyn King, Governor of the Bank of England, said today, while unveiling the Bank’s quarterly inflation report, projections were "not far away" from two quarters from showing slight negative growth.

However Mr King said there was a "huge difference" between two quarters of -0.1 per cent growth, and six quarters to -0.5 per cent growth.

"Those are the things that matter, rather than some technical definition, and our projections are a world away from a severe slowdown," he said.

In a move which will worry homeowners, the Bank also gave warning that interest rates may fall more slowly than anticipated as it tries to control inflation, which threatens to rise to more than 3 per cent in the coming year.

The Bank said that Consumer Price Index (CPI) inflation — its preferred measure of inflation — would remain above its 2 per cent target in the near term.

Inflation is highly likely to spike almost immediately from 2.2 per cent to nearly 2.7 per cent because of the recent rush in energy providers raising gas and electricity bills while rising foods costs could push inflation higher still, towards 3 per cent.

Mervyn King, Governor of the Bank of England, said it was more likely than not that he would have to write to the Chancellor - something he is required to do if inflation reaches 3 per cent.

In April last year, Mr King became the first Governor, since the Bank gained independence in 1997, who was forced to write a letter of explanation to the Chancellor, who was Gordon Brown at the time, detailing why CPI inflation had reached 3.1 per cent.

Mr King said: “Over the next couple of years, it is odds-on I will have to write another letter. I can’t be entirely sure in which direction. It is rather more likely than not.”

Howard Archer, chief UK and European economist at Global Insight, said: "The quarterly Inflation Report indicates that only limited further reductions in interest rates are likely as the Bank of England carries out the very difficult balancing act of containing inflation while trying to support growth.

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