Bank of England Governor Mervyn King said that the ailing UK economy continued to “bump along the bottom”, although he held out hopes for a “gradual recovery” in output.

His comments came as the Bank’s latest inflation report admitted that the UK’s crawl out of recession last year was weaker than hoped and lowered November forecasts for the pace of the recovery.

The report predicts that inflation will spike at around 3.5 per cent early this year - triggering another open letter to Chancellor Alistair Darling - before falling back below the Bank’s 2 per cent target.

Mr King said there were “signs that many economies are on the mend”, although “much uncertainty remains” about a sustained rise in global demand.

The pace of the UK recovery is predicted to be “somewhat less strong” than three months ago, with year-on-year growth likely to be around 3.5 per cent by the end of 2010 - rather than the 4 per cent forecast in November.

Huge help for the UK economy through £200 billion in quantitative easing (QE) and record low interest rates countered the headwinds of the “damaged banking system”, he said.

He added that it was far too soon to conclude that no further asset purchases under the QE programme to boost the money supply would be needed.

The Bank’s inflation forecast hinted at further measures to aid the economy and signalled that interest rates may be slower to rise than City commentators expect.

Although the Bank said inflation prospects remain “unusually uncertain”, its forecasts show the consumer prices index slightly undershooting the 2 per cent target in two years’ time even if rates are kept at 0.5 per cent and there is no unwinding of QE.

The report also outlined tough times ahead for consumers and the prospect of “significant fiscal contraction” in the years ahead, with households boosting savings amid fears of higher taxes.

The report also warned there was a risk that employment could fall significantly further if the recovery in demand is slower than companies expect.

Richard Boot, chairman of the Instituteof Directors in the West Midlands, said:  “We agree with the Governor of the Bank of England that it is far too soon to conclude that a further extension in quantitative easing won’t be required. We think that it will; the risk of a further dip into recession remains high.”