In its quarterly inflation report released today, the BoE says the recession appeared deeper than previously estimated and GDP fell further in the second quarter of 2009.
It said that factors such as credit conditions remaining tight as banks continue to repair their balance sheets and high levels of public and private debt will hinder recovery.
But it said that the stimulus from quantitative easing and fiscal policy should lead to a slow recovery in economic activity.
The Consumer Price Index inflation fell back to 1.8 per cent in June – a bit below the 2 per cent target and the Bank says that inflation is more likely to be below target in the medium term than above.
But it says there are significant risks to the inflation outlook in each direction.
The report says: “Inflation is likely to be unusually volatile in coming months, reflecting past changes in energy prices dropping out of the twelve-month comparison and the reversal of the reduction in VAT.
‘It is more likely than not that inflation will temporarily fall below 1 per cent in the autumn, requiring an open letter from the Governor to the Chancellor, before rebounding to around the target.”