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August 13, 2009

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BOE sees positive short-term indicators

THE traditionally cautious Bank of England struck a note of optimism yesterday, highlighting positive short-term signs on the economy and forecasting a likely return to growth in the next few quarters.

But the British central bank also warned that recovery would be slow, with a significant risk that inflation will undershoot its 2 percent target.

The bank's quarterly inflation report said the recession "appeared deeper than previously estimated" but pointed to "encouraging signs" that its unprecedented monetary stimulus was taking effect.

The bank has slashed interest rates to a record low of 0.5 percent and added some 50 billion pounds (US$82 billion) to its program to increase the money supply in an effort to get the economy going again.

The British economy shrank 0.8 percent in the second quarter, worse than expected and the fifth straight quarter of decline.

Inflation in June fell back to 1.8 percent, and the bank forecast that the inflation benchmark used by rate-setters would stay well below its 2 percent target for much of the coming two years.

Bank of England Governor Mervyn King said he would probably have to write to Chancellor Alistair Darling later this year to explain why inflation has fallen more than 1 percentage point below the target.

He is obligated to do so under British law if inflation targets aren't met.

The central bank said that, while the economy had shrunk more than expected at the beginning of the year, the pace of contraction had slowed and stronger results from business surveys "suggested that the trough in output was near."


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