Associated Press | November 11, 2009
By Jane Wardell

LONDON (AP) -- The Bank of England raised its forecasts for economic growth and inflation on Wednesday, but warned that Britain's economic recovery is just beginning and that its strength remains "highly uncertain."

Bank Governor Mervyn King said the bank's moves to slash interest rates and pump billions of pounds into the economy, increased spending by the government and the depreciation of the British pound were likely to drive a recovery.

In its quarterly inflation report, the bank predicted that the economy will return to growth by the beginning of next year, and expand by about 3.75 percent by the end of 2011 -- faster than it had forecast in August.

King said at a press conference after the report's release that he expects last month's data showing Britain was still officially in recession to be revised upwards.

The report also predicted inflation would rise sharply above the bank's 2 percent target in the short term, but that it would fall below target in two years time if interest rates rise gradually from the middle of next year as markets expect.

However, King cautioned that Britain has "only just started on the road to recovery and the adjustment to balance sheets still has much further to run."

"Despite a recovery in economic growth, output is unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis period," he said.

The pound fell against the U.S. dollar after King's comments as markets factored in the likelihood that interest rates would remain low for many months. Sterling was down half a percent at $1.6664 midmorning.

The Bank of England slashed interest rates to the current record low of 0.5 percent and embarked on a 200 billion pound ($333 billion) asset purchasing program to boost the money supply after Britain entered its worst downturn in decades.

While other major economies like the United States, Japan and Germany have recently recorded a return to growth, Britain remains officially in recession, shrinking 0.4 percent in the third quarter.

Britain was hit particularly hard by the global credit crunch because of its huge financial sector, where the government was forced to carry out a multibillion pound bailout of major banks, and higher levels of personal debt among consumers. Like the US, it also faces a collapsed real estate bubble.

King downplayed the third quarter gross domestic product figures on Wednesday, pointing out they were the first estimate and would likely be revised when the Office for National Statistics gathered more data.

The Bank of England's forecasts are based on the assumption that the benchmark interest rate, currently at 0.5 percent, rises to meet market expectations of an average of 1.1 percent in the third quarter of 2010 and 2.1 percent in the first quarter of 2011.