Alistair Darling's lingering hopes for a rapid revival in the faltering economy next year were undercut yesterday as the International Monetary Fund reduced its forecasts for Britain's growth and sounded a warning that the country faces two years of economic pain.

Yet despite predicting that the UK economy will suffer its weakest two years since the last recession, the IMF cautioned that soaring inflation leaves the Bank of England “little scope” to cut interest rates to shore-up growth.

The fund also used its annual economic health check on Britain to warn Mr Darling not to gamble with the nation's finances by using an expected autumn overhaul of the Treasury's fiscal rules to try to borrow his way out of economic trouble.

It said that the Treasury was already set next year to breach the rule capping national debt at 40 per cent of GDP as it slides deep into the red.

In the latest heavy blow to Mr Darling's optimistic forecasts, the IMF said that a barrage of economic woes would cut UK growth this year to only 1.4 per cent. That was down from the 1.7 per cent it predicted in the spring, and far below the Chancellor's projection for growth of at least 1.75 per cent.

Growth next year will be weaker still at a meagre 1.1 per cent, the IMF projected, compared with Mr Darling's present view that it would rebound to at least 2.25 per cent.

There was scant consolation for the Chancellor as the fund added that, while it expected Britain to skirt recession, it did not expect it to succumb to this fate before the downturn reaches a low-point at the turn of the year, and a gradual revival starts next spring.

The IMF said that Britain's woes were being worsened by a slumping housing market, the continuing credit crunch, and rising unemployment. It said that it expects house prices to tumble by about 15 per cent over two years, “rather than a more precipitous correction”, but it noted some warning signs threatening a bigger plunge.

Despite this, its report concluded that with inflation likely to hit 5 per cent during the summer, the Bank could not afford to cut interest rates, at today's meeting, or in coming months. Nor was there any clear case for an immediate rate rise, it said.

With the Treasury working on plans to rejig its strict rules for the public finances, the IMF cautioned the Chancellor against any relaxation of present plans to curb already high government borrowing in coming years. It said that Mr Darling should steer a course to bring national debt back below the 40 per cent cap.

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