BoE says inflation will hit 0.5%

Inflation will hit just 0.5 percent in two years as the economy shrinks rapidly over 2009, new Bank of England forecasts showed today, opening the way for further interest rate cuts ahead.

In its quarterly Inflation Report, the central bank predicted inflation well below the 2 percent target for the next 3 years if rates were to follow the path set by the market yield curve.

This assumes rates falling to a trough of 0.7 percent in the third quarter and only rising to just over 2 percent at the end of next year.

GDP is seen falling for most of this year before recovering at the end of the year.

The report is likely to boost expectations that the BoE will cut interest rates again next month after its 50 basis point reduction to a record low of 1 percent last week.

The central bank also discussed the efficacy of monetary policy once rates fall to very low levels and noted that the latest reductions were probably already having less impact.

It noted that it had been given the powers to raise the monetary base to boost demand but said there were still uncertainties over the strength of these channels.