Central Banks

UK economic growth forecasts cut on sterling strength

BoE's Carney: Housing activity is softer
BoE's Carney: Housing activity is softer
BoE: Inflation back at 2% in 2 years
BoE: Inflation back at 2% in 2 years
A 'much more realistic' BoE forecast
A 'much more realistic' BoE forecast

The Bank of England has cut its growth forecasts for the next three years after a stronger pound and changing interest rate expectations took their toll on growth.

The U.K. central bank's forecasts for gross domestic product (GDP) growth in 2015 have been cut from 2.9 percent to 2.5 percent, while 2016 predictions were brought down from 2.9 percent to 2.6 percent.

The Bank warned about weakening productivity, as concerns about the quality of jobs being created in the U.K. persist. The U.K.'s unemployment rate fell to 5.5 percent -- its lowest level since mid-2008 -- in the first quarter, while worker's pay rose slightly more than expected, official figures released Wednesday showed.

Read MoreSterling falls as UK narrowly misses deflation

Inflation should stay low for the rest of the year, with the Bank forecasting just a 0.6 percent rise this year after low energy prices.

The Bank of England
Alice Tidey | CNBC

Mark Carney, the Governor of the Bank of England, wrote in a letter explaining the fall in inflation to re-elected Chancellor of the Exchequer George Osborne that energy prices are "the most important single reason for below-target annual inflation".

He added that he believes inflation around 0 percent is unlikely to endure, and predicts it will be back at around the Bank's target of 2 percent within two years.

Osborne, whose Conservative Party government was returned to power with a surprise majority last week, said in response that he "has a clear mandate to také the steps needed to return them (the public finances) to surplus" - reinforcing the government's commitment to austerity policies.