The Bank of England has upgraded its economic growth forecast and said that inflation should fall faster than previously predicted.

In his last inflation report as the Bank's governor, Sir Mervyn King said inflation should drop to its target of 2% within two years.

In February, the Bank said inflation would fall to 2.3% in the same period.

Separate figures showed UK unemployment rose by 15,000 in the first three months of the year to 2.52 million.

However, the number of people claiming Jobseeker's Allowance fell by 7,300 last month to 1.52 million, the figures from the Office for National Statistics (ONS) showed.

Risks to the recovery

Presenting the inflation report, Sir Mervyn said: "Today's projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago.

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Stephanie Flanders

Economics editor

It's good to see the Bank of England Governor raising the growth forecast - for once - and talking about a modest recovery.

But he and everyone else had hoped to see this kind of growth several years ago.

Even the new Bank forecasts don't show Britain's national output getting back to where it was before the crisis until the end of 2014 - and that's if we don't have a lot more bad news from across the Channel.

The Bank also expects inflation to be above the 2 per cent target for at least another 2 years, at a time when earnings are growing at their slowest rate in more than a decade.

So household incomes will continue to be squeezed, even if the Bank's right that economy is now on the road to recovery.

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"That's the first time I've been able to say that since before the financial crisis.

Sir Mervyn said the Bank now expects GDP growth of 0.5% during the current quarter.

"This hasn't been a typical recession and it won't be a typical recovery. Nevertheless, a recovery is in sight."

Inflation has been above the 2% target since December 2009, and currently stands at 2.8%.

The stubbornness of inflation to remain above target is one of the reasons why the Bank has not expanded its bond purchasing scheme, or quantitative easing. Doing so would push inflation higher.

But while the Bank said the outlook was slightly more rosy than it was three months ago, the underlining picture remained subdued.

"The economy is likely to see a modest and sustained recovery over the next three years," the Bank said, though it added that the recovery would "remain weak by historical standards".

Weak demand from the eurozone and figures showing that France fell back into recession in the first three months of the year also prompted the Bank to note that the "main risks to the recovery continue to emanate from abroad".

Misplaced optimism?

David Kern, chief economist at the British Chambers of Commerce, said Sir Mervyn's analysis might be a little over-optimistic.

The Bank of England says a "recovery is in sight"
"We accept that growth is likely to remain positive, but believe that the speed of the recovery will be somewhat slower than the governor indicated", he said.

"The grim eurozone data also shows that our exporters will face obstacles over the year ahead. We also think that the inflation outlook is slightly worse than the report suggests, and future falls in 2013 and 2014 will not happen as quickly."

The pound rose 0.3% against the dollar to hit $1.5272 after the inflation report was released, although it then fell back.

Despite the more upbeat forecast from the Bank of England, Sir Mervyn said the Bank could not fix the economy on its own.

"Monetary policy alone, however, cannot solve all our problems. There are limits to what can be achieved by general monetary stimulus in any form," he said.

Sir Mervyn is to step down from the post of governor when his replacement Mark Carney takes over in July.

"I've had my say," he said. "Now it's time for the next generation to have theirs."