City economists were today cautiously optimistic about seeing an end to the credit crunch within months, after surprisingly positive statements from the Bank of England and the US Federal Reserve overnight.

The Bank of England, headed by Governor Mervyn King, gave a clear signal that the worst is over for the crisis when it said banks had over-exaggerated the extent of their losses from the subprime debacle.

In its twice-yearly Financial Stability Report, the Bank said that, in their assessment of the value of their investments, they had taken a far too negative view. As this became clear, bargain-hunting investors would start buying up these assets again, restarting liquidity in the credit markets in the coming months.

The Bank's upbeat assessment came as the Fed signalled last night's quarter-point interest rate cut would now be followed by a pause in the rate cutting focus.

While remaining cautious about the tough times for the US economy, Ben Bernanke, the Fed's chairman, and his fellow policymakers stopped referring to the "downside risks" to economic growth in their statement.

Economists and investors were poring over the two statements this morning and generally concluding that the outlook for the global banking sector was at last starting to look better.

Geoff Dicks, chief economist at the Royal Bank of Scotland (RBS), said: "You would almost think the Bank of England was acting in concert with the Fed to put out a positive view."

He said that RBS's US team had overnight changed its view of the American economy and was now more optimistic about the prospect of a recovery. "We do not think the US is dead in the water," he said.

Philip Shaw, economist at Investec, said: "I suspect the Bank of England is right. The credit markets will start to respond to the actions it has taken.

"It will take a while to unwind completely, but we are fairly hopeful of a visible improvement fairly soon.

"In the next few weeks, Libor [The rate at which banks lend to each other] will come down."

The market reaction to the two central banks' pronouncements were muted, with the FTSE 100 index opening fairly flat and Asian markets having a mixed session. However, analysts said this was because the Fed action had been widely priced into the market, particularly following yesterday's surprisingly strong GDP numbers from the US.

These showed the economy still ticking along at 0.6% in the first quarter of the year.

US Treasury Secretary Henry Paulson said last night that he supported the Federal Reserve's interest rate cuts. Paulson also said he believes the weak economy and the dollar will eventually recover.

"I've got confidence in the Fed and I've been very supportive of what the Fed has done and what the Fed is doing," Paulson said after the Fed lowered its key interest rate by a quarter-percentage point to 2%.