Bank report may signal QE wind down

By Fiona Shaikh

LONDON (Reuters) - Inflation will hit its 2 percent target and growth will return in the medium term, new Bank of England forecasts are expected to show on Wednesday, signalling the economy is ready to be weaned off its stimulus.

The forecasts will have underpinned the Monetary Policy Committee's decision to halve the size of its latest cash injection to 25 billion pounds from the unexpectedly generous 50 billion it pumped into the economy between August and October.

Analysts said Wednesday's Inflation Report will show inflation picking up sharply in the near term but returning to target in 2 years if rates follow market expectations, a higher profile than in August, when inflation was seen below target.

The growth forecast, by contrast, is likely to be little changed from August, showing the economy picking up to return to growth at some point in 2010.

Some analysts reckon the forecasts will suggest a pause in the asset purchase programme once the current 200 billion pounds runs out in February, but most see rates staying at their record low of 0.5 percent until well into 2010.

"It would seem that the Bank is now in wind-down mode when it comes to quantitative easing -- weaning the economy and the financial markets off their life-support system," said George Buckley, economist at Deutsche Bank.

Certainly, recent purchasing managers surveys indicate the economy got off to a strong start in the fourth quarter, after official data showed Britain was stuck in recession in Q3, notching up its longest-ever downturn.

And in the statement accompanying last week's decision, policymakers said the economy may soon pick up, helped by the massive monetary and fiscal stimulus measures that were still working their way through.