Bank says weak economy poses risk to CPI undershoot

LONDON (Reuters) - The Bank of England said that risks to inflation had fallen further because of weaker economic activity since its November inflation report, after it cut rates by 1 percentage point to 2.0 percent on Thursday.

Inflation had a substantial risk of undershooting the Bank of England's 2 percent target over the medium term, though sterling's weakness and falling market interest rates posed upward inflation risks, it said.

"The (Monetary Policy) Committee judged that ... there remained a substantial risk of undershooting the 2 percent CPI inflation target in the medium term," the Bank said.

The Bank said that liquidity conditions remained extremely difficult, and that normal bank lending was unlikely to resume without further measures.

(Reporting by David Milliken; editing by David Stamp)