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BoE's King to Offer Good News In His Final Forecast

Mervyn King, Governor of the Bank of England
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Mervyn King, Governor of the Bank of England

Bank of England chief Mervyn King should be the bearer of some good news on Wednesday in his final forecasts before handing the reins to Mark Carney, even if the British economy remains far from healthy.

After repeatedly having to cut its growth outlook and lift its inflation forecasts since the financial crisis, the central bank looks set to do the opposite in its latest Quarterly Inflation Report.

(Read More: 'Herd Behavior' Makes BoE Action a Closer Call)

Economists polled by Reuters last week expect the bank to forecast that inflation will peak at 3.0 percent later this year, below the 3.2 percent predicted three months ago.

Most also expect the BoE to bring forward the date when it expects inflation to return to the 2 percent target, following a recent slight strengthening of sterling and a drop in oil prices, after breaching the target for most of the past five years.

In February, the central bank unsettled some in financial markets by predicting that inflation would not return to target until the first quarter of 2016.

Rob Wood, a former BoE economist who now works for Berenberg Bank, predicts this forecast will now be brought forward by a year to early 2015.

"That fillip of good news is unlikely to be accompanied by a wholesale change to the big picture, however," Wood said. "We expect the BoE to continue to forecast a sub-par recovery. More stimulus is needed and we expect it to be forthcoming."

(Read More: UK Looking Good in 'New Normal': Ex BoE Official)

King - who has presented the BoE's Inflation Report for more than 20 years, first as chief economist and then as governor - is likely to continue to point to major economic risks when he gives a news conference at 0930 GMT.

He has led a minority of policymakers calling for more bond-buying since February. King has also long warned Britain of the painful readjustment it needs to shift away from consumption and towards export-led growth.

Britain's economy grew by a sluggish 0.3 percent in the first three months of 2013 from the previous quarter. In a sign of the fragility of the recovery to date, that was welcomed as a lucky escape from a feared return to recession.

Solid business surveys since then, plus a revamp of BoE measures to stimulate bank lending, may tempt the central bank to nudge up its short-term growth forecast, which hovers around 1 percent for this year.

(Read More: Bank of England Holds Back on New Stimulus)

In recent months the BoE has cooled on its main tool used to help Britain recover from the financial crisis - the purchase of 375 billion pounds ($575 billion) of government bonds.

It stopped buying bonds in October, and last month it expanded its Funding for Lending Scheme, which started in August, to give banks greater incentives to lend to business.

Further changes are likely to come with the arrival of Carney, who was poached from the Canadian central bank by British finance minister George Osborne. Carney has championed making long-term commitments to low interest rates, something the BoE under King has opposed.