The Bank of England today surprised economists by raising its forecasts for economic growth over the next two years, stating that the weak pound and its £200 billion money printing scheme should help restore confidence.

Unveiling its Inflation Report, the Bank stuck to a previous prediction that economic growth would return at the start of next year but raised its forecast for the speed of recovery.

The Bank of England said that gross domestic product — a key measure of economic growth — should rise above 4 per cent in early 2011 before easing back towards 3 per cent by the end of 2012.

While Mervyn King, the Governor of the Bank of England, said that Britain's recovery has "just started", today's up-tick in forecasts is a boost since only in August, the Bank was predicting growth would barely rise above 3 per cent over the next three years.

Hopes that the economy is recovering were boosted today when the Office for National Statistics (ONS) revealed that unemployment had rise by the smallest rate since spring last year to 2.46 million. Economists had been expecting total jobless to hit 2.5 million.

Britain's jobless rate stood at just 7.8 per cent, compared with 7.9 per cent between April and June, and below expectations of a rise to 8 per cent.

The number of people claiming unemployment benefit in October rose by 12,900, below the expected 20,000 increase, to 1.6 million.

Mr King said today that the country's recovery should be helped by the £200 billion quantitative easing programme and the low interest rate, which has remained at a historic low of 0.5 per cent for eight months.

Last week, the Bank of England's Monetary Policy Committee (MPC), voted to increase its scheme to pump extra funding into the economy by a further £25 billion to £200 billion.

The Governor said: "The considerable stimulus from the past easing of monetary and fiscal policy and the depreciation of sterling should lead to a recovery in economic activity."

Commenting on inflation, Mr King said that he expects the rate "to rise sharply over the next few months, to above the target, reflecting higher petrol price inflation and the reversal of last year’s temporary reduction in VAT".

The rate of VAT is set to revert to 17.5 per cent in January after being cut to 15 per cent in an effort to boost economic growth.

But Mr King added: "After rising sharply in the near term, inflation is likely to fall back to below the target, as the impact of the past depreciation of sterling fades, and as the margin of spare capacity pushes down on CPI inflation."

The bank is basing its inflation forecasts on market predictions that interest rates will remain flat at about 0.5 per cent until the middle of next year, and then rise gradually to around 3 per cent by the autumn of 2011.

Howard Archer, chief UK and European economist at IHS Global Insight said the report implied that "Interest rates are likely to stay down at 0.5 per cent until at least late-2010, and very possibly beyond."

The Consumer Price Index (CPI) measure of inflation is currently at 1.1 per cent, below the Bank's target of 2 per cent.

Mr King cautioned: "Inflation has been unusually volatile recently. It is currently 1.1 per cent, having been 5.2 per cent only a year ago. Such volatility is likely to continue in the short run."

The central bank expects inflation to rise sharply to above 2 per cent in the next few months — higher than forecast in August — before easing back to about 1.6 per cent in the medium term.

The Bank said: “The risks of inflation being above or below target are broadly balanced by the end of the forecast period. But there are significant risks to the inflation outlook in each direction.”

It suggests that last week’s announcement of an extra £25 billion could be the final top up to the quantitative easing programme.

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "The Bank’s forecast still suggests that economic growth will pick up swiftly, which seems highly optimistic.

"The Bank is hoping that the boost from weak sterling kicks in and that the quantitative easing programme feeds through...Regardless of whether or not there is more quantitative easing, policy is unlikely to be tightened in the short term."

Alan Clarke, of BNP Paribas, said: "It’s more dovish than I expected. King has played down the likely short-term spike in inflation and is saying the market has got ahead of itself in terms of the timing of rate hikes.”

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