The U.K. economy would see a slow recovery and expects inflation to stay below target in coming few years, the latest quarterly Inflation Report from the Bank of England said Wednesday.

CPI inflation is likely to drop below the central bank's target of 2% later this year on diminishing contribution from food and energy prices.

The central bank said, Under the assumptions that Bank Rate moves in line with market rates and the stock of purchased assets financed by the issuance of central bank reserves reaches GBP 125 billion, it is more likely than not that CPI inflation will be below the 2% inflation target in the medium term.

The Inflation Report is produced quarterly by the Bank staff under the guidance of the members of the Monetary Policy Committee.

The central bank expects the economy to resume growth from early 2010 and to reach around 2.5% in a two-year period. The outlook for economic growth is unusually uncertain, the BoE revealed.

The outlook for domestic activity and inflation continues to be dominated by the balance between opposing forces.

The central bank estimates a 1.9% contraction in the first quarter of 2009, a larger decline than anticipated at the time of the February Report. The MPC sees a relatively slow recovery in economic activity. BoE Governor, Mervyn stated that there are solid reasons for supposing that there will be a recovery next year.

King said during the press conference the economy needs time to heal. He sees relatively slow and protracted recovery in the UK economy.

Regarding outlook for credit supply, the BoE said the outlook depends on the adjustments underway in the banking system. As the economic outlook has deteriorated, banks' current and prospective losses have increased and there has been an abrupt reduction in the supply of credit to households and companies.

Last week, the BoE had decided to maintain its key interest rate at a historical low of 0.5% and to continue with its scheme of asset purchases financed by the issuance of central bank reserves. The central bank raised the size of the scheme by GBP 50 billion to GBP 125 billion.

King also said today that it would take time to fully assess the impact of quantitative easing to become clear.

Peter Dixon, an analyst at Commerzbank said it is well known that recessions triggered by balance sheet restructuring result only in modest recoveries and it seems that this time will be no exception.

Commenting on the inflation report, David Kern, Chief Economist at the British Chambers of Commerce said, We agree with the Bank's assessment that growth prospects will be weaker than they estimated in their last quarterly report. However, the projected recovery in 2010, and particularly 2011, still appears too strong.

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