The probability of a recession is still very small

Mervyn King, Bank of England

But the economy is set to slow next year as the effects of the global slowdown take hold, the Bank said in its latest quarterly inflation report.

The Bank also predicted that inflation is set to stay below its target level, and said there are signs that the UK labour market "may be turning."

Earlier on Wednesday new unemployment figures had shown the number of people claiming benefits had increased.

Slower growth

Presenting the latest report, the Bank's deputy governor Mervyn King said the chances of a recession were slim.

"The probability of a recession is still very small. I hesitate to put a number on it but if I had to it would be about one in 10," he said.

The Bank's report does forecast slower growth for the UK economy next year.

But the recent interest rate cuts should help offset some of the impact, and the Bank says growth should begin to pick up again in 2003.

But the Bank warns that the risk still remains that the "slowdown in the international economy may be deeper or more prolonged" than expected.

Higher unemployment expected

The Bank said there were signs that the labour market may be about to take a turn for the worse.

And only an hour earlier, the latest government figures had shown the number of people out of work and claiming benefit rose last month.

This trend is expected to continue as more companies cut jobs, and other firms put a halt on recruitment.

The Bank noted that the strength of consumer spending has helped maintain growth in the UK economy, but this could also be about to turn.

"Falls in equity prices, moderating house price inflation, lower consumer confidence and slowing real income growth suggest that consumer spending will decelerate."

The Bank said underlying inflation is likely to fall back to about 2% next year, before rising back up to its target of 2.5%.

On Tuesday latest inflation figures had shown the underlying rate remaining stable at 2.3% in October.