The Bank of England has warned that the short-term outlook for the UK economy was "rather lower" than expected, casting further doubt on Chancellor Gordon Brown's economic forecasts.

In its Quarterly Inflation Report, the Bank said inflation was set to fall to just below 2.5 per cent by the beginning of next year, but would then edge up over the remainder of the forecast period - which runs to 2005.

There was better news for the Chancellor, with the Bank predicting economic growth would come closer his 3.0 per cent to 3.5 per cent target during the second year of the forecast.

Economists have warned Mr Brown's targets are looking increasingly over-optimistic with consumer spending falling sharply in the first quarter of 2003.

Inflation has risen above 2.5 per cent, mainly due to short-term influences, including the war in Iraq, which led to a deterioration in confidence, the Bank said.

The growth of UK gross domestic product (GDP) is provisionally estimated to have dropped back to just 0.2 per cent in the first quarter - well below the Bank's expectations outlined in February.

Despite the sluggish economic outlook, the Bank said that the overall risks to growth and inflation were "broadly balanced".

Among the risks to growth are the uncertainty about the strength and timing of global recovery now that major fighting in Iraq has ended.