Economic recovery will be slow: BoE

The Bank forecast that the inflation benchmark used by rate-setters would stay below its 2% target for a long time if rates follow market expectations and begin to rise next year.

And even if the cost of borrowing remains at 0.5% the Bank is not forecast to hit target until the middle of 2011.

The Bank admitted the scale of the recession was worse than it had expected just three months ago, although it said the pace of contraction had slowed and stronger results from business surveys "suggested that the trough in output was near".

It said its £175 billion quantitative easing (QE) scheme - effectively printing money - would help facilitate a slow upturn but warned that "the timing and strength of that recovery remains highly uncertain".

The quarterly inflation report showed that if rates rose with market expectations - to around 2% by the end of 2010 and nearly 4% by the end of 2011 - inflation would be just 1.5% in two years' time.

Vicky Redwood, of Capital Economics, said the report gave a "clear signal" that monetary policy would not be tightened in the near future. She said the predictions based on the cost of borrowing remaining the same during the period broadly hit the target but these were based on a sharp recovery.

"If the recovery is more sluggish than this - as we expect - more QE is likely to be necessary," she said. "We continue to expect monetary policy to remain extremely loose for the rest of this year and next year too."

Rate-setters agreed an unexpected £50 billion boost to the money supply through its QE scheme last week, following a worse-than-expected 0.8% fall in output between April and June.

Governor Mervyn King said the Bank's Monetary Policy Committee decided to boost QE because "we felt there were real downside risks to inflation". Mr King added it was more likely than not that he will need to write to Chancellor Alistair Darling later this year to explain why inflation has fallen more than one percentage point below the target.