The Bank of England Wednesday left open the possibility of further stimulus for the U.K. economy after its latest forecasts showed inflation is likely to remain below its 2% target for the next two years.
The U.K. central bank said assuming that its key interest rate remains at a record low of 0.5% and the stock of assets purchased under its bond-buying stimulus program stays at GBP325 billion, then "inflation is judged to be somewhat more likely to be below the target than above it for a good part of the forecast period," the BOE said in its quarterly inflation report. Its forecasts show inflation is likely to be around 1.6% by the end of 2012.
But the central bank added that by 2014 the chances of inflation being on target are "broadly balanced."
That may suggest any further stimulus, if sanctioned, is likely to be modest. Charts show the chance inflation overshoots its 2% target within two years have risen since the bank's last forecasting round in November, to around 40%.
The forecasts show the BOE expects economic growth to remain weak in the short term but should start pricking up in the second half of 2012 as retreating inflation boosts households' spending power.
The BOE said the sovereign debt crisis in the neighboring euro zone continues to cast a shadow over U.K. prospects.
"The most significant threat to the domestic recovery stems from the euro area," the central bank said.
Weak bank lending and the government's public spending cuts will also weigh on activity, it said.
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