Nov. 11 (Bloomberg) -- Bank of England Governor Mervyn King said the U.K. economy faces a “hard path” back to health and he has an “open mind” on further bond purchases, signaling officials aren’t ready to withdraw stimulus yet. “Even if we get significant positive growth rates in the future, we have a long way to go to get back to where we were,” King told reporters in London today. Deputy Governor Charles Bean said credit is still tight and there are signs some companies are turning away orders because of a lack of capital. The pound fell and bonds rose after King unveiled the central bank’s quarterly forecasts. The Bank of England last week expanded the bond-purchase plan to 200 billion pounds ($335 billion) and the governor said today the U.K. faces a “prolonged period of balance sheet adjustment.” “We have a completely open mind as to whether to do more asset purchases or not,” King said. The pound fell against all 16 of its most-traded peers tracked by Bloomberg and government bonds erased earlier declines. The British currency fell as much as 0.5 percent today and traded at $1.6653 as of 3:22 p.m. in London. The yield on the two-year U.K. government bond slipped five basis points to 0.7 percent. “It was very important that he did not rule out further asset purchases,” said Colin Ellis, an economist at Daiwa Securities SMBC in London and a former Bank of England official. “That could suggest one or two people wanted to do more last week. The bank’s been surprised on the downside several times on this recession. King’s very conscious he doesn’t want to rule out further action.” Fan Charts The bank, which publishes its forecasts as fan charts, said inflation will stay below its 2 percent target for most of the next three years before edging above that level. The inflation rate dropped to 1.1 percent in September, the lowest in five years, as the recession purged cost pressures in the economy. “Downward pressure from the persistent margin of spare capacity” will probably “bear down on inflation for some time to come,” the Bank of England’s quarterly Inflation Report said. The forecasts are based on investor assumptions that the benchmark interest rate, currently at 0.5 percent, will rise to 1.1 percent in the third quarter. “We were surprised about how far sub-target the inflation projection was,” said Richard McGuire, an economist at Royal Bank of Canada in London. “It was best for them to pursue a ‘glass half-empty’ approach on the economy and that’s what they did.” Pound’s Declines King signaled he’s comfortable with the pound’s 27 percent slide against a basket of currencies from other countries over the past two years. The weaker pound may boost exports and help the economy shift away from domestic spending, he 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,” King said. The central bank’s forecasts show it estimates the economy has started expanding again and won’t slip back into a recession. Investors have become pessimistic about the pound for the first time since April on the view that the central bank will keept rates on hold until the second half of 2010, according to a survey of 1,558 Bloomberg users published today. The currency will fall over the next six months, the survey showed. The Bank of England governor stressed the need to curb the budget deficit, one day after Fitch Ratings said the U.K.’s sovereign credit rating is most at risk among top-rated nations. Britain last month reported the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs. Asset Bubbles “The need for a credible plan to ensure a substantial reduction in the fiscal deficit is now clear to everyone,” he said. At the same time, Fitch’s warning shouldn’t be taken at “face value.” King also signaled he’s not yet concerned about a renewed bout of asset bubbles stoked by interest rates at record lows around the world. “We’re not seeing any great expansion of credit,” he said. “Indeed if we could see credit growing more rapidly that would be a very welcome step. “No central bank in the world is saying that it intends to carry on this policy forever.” To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net.

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