The International Monetary Fund (IMF) yesterday slashed its forecasts for UK growth to 1.4% in 2008 and 1.1% in 2009, down from the 1.75% projected for each of these years as recently as May.

Its action highlights the remarkable deterioration in the economic backdrop in the last few months.

However, even as the IMF predicts two years of UK growth far adrift of a 2.5% to 2.75% long-term trend rate, its report highlights the Bank of England's lack of room at present to revive the flagging economy by cutting benchmark UK interest rates.

The IMF's forecasts now contrast dramatically with Chancellor Alistair Darling's growth predictions in his March Budget of 1.75% to 2.25% this year, and between 2.25% and 2.75% in 2009. However, Darling himself has acknowledged the economic backdrop has changed significantly since he made these predictions.

Some economists are meanwhile highlighting a serious risk in the UK of technical recession - defined as two consecutive quarters of declining economic output.

The Bank of England's Monetary Policy Committee (MPC) is expected to hold UK base rates at 5% at noon today, as it faces up to the nasty combination of a stagnant economy and rampant inflation, although economists were yesterday hedging their bets by citing outside chances of a rise or a cut.

Another three-way split in the voting would seem a distinct possibility when MPC members cast their votes at the end of the committee's latest two-day monthly meeting.

July saw seven members opt for no change in rates, with resident MPC hawk Tim Besley voting unsuccessfully for a quarter-point rise and dove David Blanchflower preferring a cut of the same magnitude.

Annual UK consumer prices index inflation hit 3.8% in June - nearly twice the 2% target set for the Bank of England by the Treasury - and Bank Governor Mervyn King has highlighted the possibility of it jumping above 4% later this year.

Urging against an immediate cut in UK base rates, the IMF says in its latest annual health-check on the UK economy: "Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present."

The IMF predicts benchmark UK inflation will exceed the target for an "extended period" but, on a more reassuring note, points out there is scant evidence of "second-round" effects given that wage pressures remain subdued.

Touching on the Office for National Statistics' initial estimate last month that the UK grew by just 0.2% in the three months to June, a rate which some believe may be revised down, the IMF highlights the gloomy UK economic picture.

It says: "Second-quarter growth was weak, forward-looking indicators are gloomy, sterling money-market spreads remain elevated, unemployment has edged up, and house prices are falling rapidly."

MPC members are likely to be relieved to see a fall in oil prices from their recent all-time highs. Benchmark US light crude, which hit records above $147 a barrel in July, recorded fresh three-month lows yesterday with a fall back towards $117 a barrel during New York trading.

But the British Retail Consortium's latest shop price index yesterday highlighted continuing inflationary pressures in the UK, particularly from food prices.

The BRC said UK shop prices in July were 3.2% higher than in the same month last year, a sharp acceleration from a year-on-year increase of 2.5% in June.

It added that the year-on-year increase in food prices had accelerated from 7.0% in June to 9.5% in July.

The Scottish Retail Consortium said the year- on-year increase in shop prices north of the border accelerated from 2.5% in June to 3.8% in July.

The IMF says the UK Government's public net debt ceiling of 40% of gross domestic product is likely to be breached.

If this happens, the IMF advises concrete plans be made to bring debt back to target.

However, it remains to be seen how easy the IMF's proposal would be for the government in the prevailing economic environment.

The IMF says there is no room for looser fiscal policy, - such as tax cuts - this year and recommends increased fiscal discipline in the 2009 budget.

It considers that sterling's 10% fall in real terms over the past year has brought it closer to its equilibrium value but, in comments which may at the margin weigh on the pound in coming months, it says the UK currency remains "on the strong side".

Howard Archer, chief UK economist at consultancy Global Insight, yesterday highlighted the dilemma facing the MPC.

He said: "Unchanged interest rates seem by far the most probable outcome at the conclusion of the (MPC) meeting ... Nevertheless, it is not inconceivable that interest rates could be either raised or, less likely, cut."

Touching on the Bank's latest quarterly inflation report, which will have been compiled but will not be published until next Wednesday, Archer added: "Significantly, the committee will have available the new inflation and growth forecasts that will be contained in the ... quarterly inflation report.

"Interestingly, the minutes of the July MPC meeting commented that any change in interest rates would be better communicated alongside the Bank's August inflation report'.

"The three-way split in the MPC's voting in July encapsulates the predicament that the Bank of England is in over a deepening and widening economic slowdown, yet elevated and still-rising inflation."

Archer is forecasting UK base rates will stay at 5% until the end of 2008, before being cut steadily to 4.25% by mid-2009 and to 3.75% by the fourth quarter of next year.

He said: "We expect very weak economic activity to increasingly contain and then dilute underlying inflationary pressures."