RTTNews - Wednesday, the Bank of England said in its latest quarterly Inflation Report that the CPI inflation is likely to drop further below target in the coming months.

Downward pressure from the margin of spare capacity signals inflation is more likely to stay below target in the medium term than above, the bank said. This is based on the assumption that the Bank Rate moves in line with market rates and asset purchases using central bank reserves reaches GBP 175 billion. But, the central bank finds significant risks to the inflation outlook in both directions.

The BoE said that inflation is more likely to fall below 1% in autumn, requiring an open letter from the Governor to the Chancellor.

Although at a slower pace, output declined further in the second quarter. Reasons for the moderation in the rate of contraction in the second quarter are key to assessing whether that easing will continue in the second half of 2009. The turnaround could in part reflect the inventory cycle, the BoE added.

Output is now estimated to have declined 5.6% over the last year, which was the largest four-quarter fall since records began in 1956.

The Monetary Policy Committee continues to judge that the stimulus should lead to a slow recovery in economic activity, but the timing and strength of that recovery remains highly uncertain, the bank said.

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