Published: Wednesday, 11 Nov 2009 | 11:34 AM ET

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The Bank of England has an open mind on the need to pump more newly-printed money into the economy, Governor Mervyn King said on Wednesday, after the central bank forecast below target inflation.

AP Bank of England Governor Mervyn King

A week after the BoE raised its asset-buying program by another 25 billion pounds to 200 billion ($334.8 billion), its quarterly Inflation Report suggested policymakers see some signs of recovery but have not ruled out further action to boost the economy.

The more dovish than expected outlook, with interest rates likely to remain at a record low of 0.5 percent for some time to come, drove bond markets higher and sterling lower and surprised many analysts who had thought the BoE's quantitative easing scheme would not be expanded further.

"It certainly would be wrong to conclude we've decided that. We've made no judgment at all, we've a completely open mind whether to do more asset purchases or not. What we did last week was not a first step towards anything," King said.

The BoE's decision last week halved the pace at which it had been buying assets -- mainly government bonds -- with newly-created money, a policy aimed at lifting Britain out of its sharpest downturn in decades.

The central bank's new forecasts were more upbeat on the economy than the last set in August, but do not incorporate the extra fiscal tightening that will likely take place if the opposition Conservatives win the election next year as expected.

The Labour government, which expects to halve Britain's ballooning budget deficit over four years, will outline updated fiscal policy plans on Dec. 9 with the publication of its pre-Budget report.

"In short, it's too soon to rule out further monetary policy action. At the very least, any tightening looks a long way off," said Jonathan Loynes, chief European economist at Capital Economics.

The policy outlook is made cloudier by the fact that the report acknowledged MPC members were divided about the relative strength of upward and downward pressures on inflation.

BoE minutes next week will show whether King urged a greater increase in QE this month than most of the rest of the MPC, as happened at the time of August's expansion.

"King pointedly refused to rule out further asset purchases -- an indication, perhaps, that some Committee members would have preferred a larger increase than the 25 billion pounds that was agreed last week," said Colin Ellis, economist at Daiwa Securities.

More Upbeat on Growth

The charts in the Inflation Report showed economic growth returning at the beginning of 2010, similar to August's forecasts, but then increasing slightly more rapidly than previously forecast to around 3.75 percent at the end of 2011.

Growth prospects were boosted by jobless data on Wednesday that showed an unexpected drop in the ILO unemployment rate to 7.8 percent in the three months to September, and the smallest rise in jobless claims for 18 months in October.

But King said there was a long way to go before the level of gross domestic product reached its pre-crisis state. He did not expect a major revision to weak third-quarter output data.

Britain failed to exit recession in the third quarter, surprising financial markets and marking its longest period of economic contraction on record.

The BoE said inflation should rise sharply to above 2 percent in the next few months -- higher than forecast in August -- before easing back below the central bank's 2 percent target to around 1.6 percent in the medium term.

Those forecasts factor in the 200 billion pound QE program and financial market assumptions of interest rates averaging 0.6 percent in the second quarter of 2010, rising steadily to 2.9 percent in Q3 2011.

"The acknowledgement that inflation is likely to undershoot the 2 percent target for most of the forecast period raises the question of why the Bank did not think it necessary to go further than increasing the asset purchase program to 200 billion pounds," said Hetal Mehta, senior economic adviser to Ernst and Young's ITEM Club.

"But with the pace of asset purchases slowing considerably, it seems the asset purchase program is being wound down. Regardless of whether or not there is more quantitative easing, policy is unlikely to be tightened in the short term."

• Slideshow: Central Banker Report Cards 2009

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