The Bank of England said Thursday that its Monetary Policy Committee's decision to cut interest rates followed a judgment that there remained a substantial risk of undershooting the 2% inflation target in the medium term. The central bank, which cut its key rate by half a point to 1%, said output had dropped sharply in the fourth quarter of 2008 and credit conditions faced by companies and households had tightened further. The bank said inflation is expected to drop below 2% by the second half of the year, but added the impact of changes in the rate of value added tax and the depreciation in sterling mean the path of inflation may be volatile.

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