Bank of England: Inflation to fall below 2 pct.

[November 12, 2008]  LONDON (AP) -- The Bank of England said Wednesday it expects inflation to fall to the government's target of 2 percent next year, but warned that inflation would then continue falling to below that level as the economy contracts further.

The report opened the door for yet more interest rate cuts by the bank, which slashed them last Thursday by a startling 1.5 percentage points

Inflation rose to 5.2 percent in September, under severe upward pressure from fast-rising food and fuel prices.

But the British economy is now teetering on the brink of a recession, and the Bank of England expects that lower consumer and business spending resulting from the broader economic slowdown will cause prices to stop rising -- leading to sharply falling levels of inflation.

"Inflation will fall below targets," Bank of England governor Mervyn King told journalists at a press conference. "but we aim to get back there in the medium term."

The Bank of England slashed its benchmark interest rate earlier this month by 1.5 percentage points in an attempt to shore up the economy as it sinks into recession, a bold cut that far exceeded economists' expectations.

The cut to a 3 percent base rate left rates at levels last seen in the 1950s.

The latest report could signal further interest rate cuts are likely. Central banks keep rates while there is a threat of inflation, since cuts done at the wrong time can make inflation worse. With the coast clear on inflation, the bank is free to focus on propping up sagging economy output by lowering borrowing costs.

[Associated Press]

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