UK economy set to shrink: Bank of England

BRITAIN'S weak economy may shrink in the last three months of the year and growth will remain sluggish into 2013, its central bank says.

The Bank of England's warning comes after the country's gross domestic product on annual basis unexpectedly grew by 1 per cent in the third quarter, ending a nine-month recession.

"Welcome as that is, it is not a reliable guide to the future," Governor Mervyn King said at a news conference introducing the Bank's quarterly Inflation Report on Wednesday.

"Output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed - indeed output may shrink a little this quarter," King said.

The bank also lowered its GDP growth forecast for 2013 to about 1 per cent.

"We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while," the governor added.

King said the Bank "has not lost faith" in quantitative easing, the economic stimulus program of asset purchases which has pumped 375 billion pounds ($A574 billion) into the British economy since 2009.

The growth spurt in the third quarter and the persistence of inflation above the official 2 per cent target led the Bank's Monetary Policy Committee to decide against any increase in QE this month.

Despite the recent recession, the Office for National Statistics said on Wednesday the UK unemployment rate fell to 7.8 per cent in the July-September period, down from 8.0 per cent in the previous three months and from 8.2 per cent in the year-earlier period.

However, there was an increase of 10,000 in the number of people claiming unemployment benefits in the month of September.

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