The International Monetary Fund (IMF), in its regular review report, cut its forecast for British economic growth for this year and next, citing the impact of the credit crunch on growth and rising inflationary pressures that constrain the Bank of England's ability to cut interest rates.

The IMF predicted the UK would grow by 1.4 per cent in 2008 and 1.1 per cent in 2009, down from the 1.8 per cent for 2008 and 1.7 per cent for 2009 that it predicted in July. This would effectively make it the slowest growth rate since 1992.

"We do not have a negative number for growth forecast in coming quarters, but when growth is skating so close to zero, it doesn't take much of a shock to see it turn negative," said Ajai Chopra, deputy director at the IMF. "A lot of the economic data that started coming out were much more grim than we had expected. The outlook has deteriorated markedly in recent months." (See: Global growth to slow to 4.1 per cent in 2008: IMF)

The IMF said inflation at 3.8 per cent was higher than expected, and inflation expectations were rising even as economic activity was slowing. That, it said, meant the Bank of England had little room to cut rates.

Contrastingly, the UK government's official estimate is for growth of 1.75 per cent to 2.25 per cent this year and 2.25 per cent to 2.75 per cent next year, but ministers have said recently that the economic outlook is looking more difficult because of the credit crunch and rising price pressures.

The IMF believes consumer-price inflation will peak at close to 5 per cent, will average 3.8 per cent this year and exceed the Bank of England's 2 per cant target for an "extended period". The report said the British pound is likely to continue to depreciate in the period ahead, adding to inflationary pressure.

Wednesday, the Bank of England's Monetary Policy Committee started a two-day meeting. It is widely expected to hold rates at 5 per cent.

The IMF report also warned the British government against increasing spending, saying that, if anything, it should accelerate its planned fiscal tightening in 2009 and 2010. It also said the government is likely to breach its 40 per cent ceiling for net debt to gross domestic product.

And it said that if the government goes ahead with changes to its fiscal rules, it should retain the 40 per cent ceiling and adopt a "clear and short horizon to bring debt back under the ceiling following a breach."

The IMF pointed out that it could take years of fiscal adjustment, with sharp spending cuts or tax rises of up to 1 per cent of GDP a year up to 2013, to bring the budget back into equilibrium.

The IMF gives its broad backing to the recently announced government plan to reform the system of financial stability to prevent another Northern Rock from emerging. But it warned that "clarity of Bank of England authority and ability to act" in the next credit crisis were essential if the reforms were to work effectively.

Commenting on the report, a UK Treasury spokesman said "the government is committed to maintaining sound public finances and, in line with its usual practice, will update its fiscal and economic forecasts" when it publishes its pre-budget report later this year.

The political opposition was obviously not so sanguine with the Shadow Chief Secretary to the Treasury Phil Hammond blasting the government -  ''The IMF report is a damning judgement on almost every aspect of Mr. Brown's legacy as Chancellor''.

The IMF also said it believes UK house prices will fall some 15 per cent from their peak levels over two years. Home prices started to drop during the second half of last year. The IMF added, though, that it expects that the impact of such a drop on the wider economy would be "contained," with lower prices having only a modest impact on consumer spending.