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Slow recovery suggests UK economy needs more help.

MORE medicine may be needed for the UK's ailing economy after the Bank of England yesterday admitted that the recovery had been slower than expected.

Governor Mervyn King said the economy continued to "bump along the bottom", although he held out hopes for a gradual pick up in output.

In its first forecast since the UK economy staged a disappointingly lacklustre exit from recession, the Bank said recovery would be "somewhat less strong" than outlined three months ago.

Mr King also indicated the possibility of further efforts to aid the economy and said it was "far too soon" to rule out an extension to the Bank's pounds 200bn quantitative easing (QE) programme. The Bank's quarterly inflation report also forecast a near-term inflation spike of around 3.5% before sliding below the 2% target even if interest rates stay at their current historic low of 0.5%.

Economists said the combination of a slower path to recovery and expectations of below target inflation in the medium term raised questions over why the Bank had not already upped its money-boosting scheme.

Jonathan Loynes, chief European economist at Capital Economics, predicted any tightening of monetary policy remains a long way off and that interest rates would stay at their current level until well into 2011.

He said he would not be surprised if some members of the Monetary Policy Committee (MPC), perhaps including Mr King himself, had wanted to increase the scheme earlier this month.

Yesterday's report also indicated a possible spilt among policymakers.

It said while the likely inflation spike of 3% in January - driven by the return to a 17.5% VAT rate and higher petrol prices - would trigger a letter to the Chancellor, the Bank can do little to alter the near-term outlook.

Although the Bank said inflation prospects remain "unusually uncertain", its forecasts show the consumer prices index slightly undershooting the 2% target in two years' time even if rates are kept at current lows and there is no unwinding of QE.

Graeme Leach, chief economist at the Institute of Directors, said he agreed more QE could be needed. But David Kern, chief economist at the British Chambers of Commerce (BCC), said the forecasts seemed "unduly optimistic".

Mr King said the UK has a "very large structural deficit which needs to be eliminated", but also played down the chances of the country losing its gold-plated triple A rating.

He said he "could not think of any reason" why theUKshould be stripped of its premium rating if action was taken on repairing the public finances.
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Publication:Western Mail (Cardiff, Wales)
Date:Feb 11, 2010
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