Bank hints it will print more money as inflation drops below forecasts

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Deputy governor Charlie Bean and new recruit Adam Posen, who joins the Bank's monetary policy committee in September, said last week's decision not to extend quantitative easing beyond £125 billion did not mean the programme was finished.

"Much too much has been made of this so-called pause," said Posen.

Asked by MPs if he could see the Bank withdrawing the newly printed money in the near future, Posen said: "I would hope to be doing it immediately because that would imply the crisis is over, but there is not a chance in hell of that happening."

It came as official figures showed consumer prices index inflation fell from 2.2% in May to 1.8% in June, the first reading below the 2% target since September 2007.

The retail prices index, which includes mortgage costs, dropped from 1.1% to 1.6%, the lowest level since records began in 1948.

Although inflation has not fallen as fast as forecast since peaking at 5.2% last year, economists said it is still likely to head below 1% and towards zero this year.

That paves the way for the Bank to leave interest rates at record lows of 0.5% and extend its programme of quantitative easing, commonly known as printing money.

Posen said: "The risks right now are more about deflation than inflation. Once you fall into a deflationary situation, it is very hard to get out.

"Interest rate cuts and quantitative easing combined with the fiscal stimulus is the right way to face this."

The Bank shocked the markets when it chose not to extend quantitative easing beyond £125 billion.

Some speculated that the Bank was close to wrapping up the plan. But Bean said: "People shouldn't read anything into the decision last week.

"In August we will have the benefit of the latest activity and inflation projections. That's a more natural point to take stock of whether we need to do more or have a pause."