The Bank of England today revealed that the recession had struck harder than previously thought but said the prospects for economic recovery were "somewhat stronger".
The Bank said it expects the economy to shrink by around 5.5 per cent at the lowest point this year before beginning its recovery.
But it added that it had seen encouraging signs that its efforts to pump more money into the financial system were taking effect.
Bank governor Mervyn King said: "It is likely that output stabilised in the middle of this year, and business surveys and other short-run indicators suggest that growth is more likely than not to resume over the next few quarters."
In its quarterly inflation report, the Bank forecast that the inflation benchmark used by rate-setters would stay well below its 2 per cent target for much of the coming two years.
Mr King said it was more likely than not that he will need to write to Chancellor Alistair Darling later this year to explain why inflation has fallen more than one percentage point below the target.
The Bank said that, while the economy had shrunk more than expected at the beginning of the year, the pace of contraction had slowed and stronger results from business surveys "suggested that the trough in output was near".
Rate-setters agreed an unexpected £50 billion boost to the money supply through its quantitative easing (QE) scheme last week, following a worse than expected 0.8 per cent fall in output between April and June.
Mr King said the Bank's Monetary Policy Committee decided to boost QE because "we felt there were real downside risks to inflation".
Today, the report said the stimulus, along with the previous drop in sterling, would lead to "a slow recovery in economic activity" but it warned that the timing and strength of the upturn was highly uncertain.
It said the projections for output, which are based on interest rates held at their record low of 0.5 per cent and its full £125 billion QE scheme, were somewhat stronger than in its previous report because of the stimulus.
The report said: "The probability of activity contracting for a further sustained period is judged to have fallen."