Inflation forecast hits rate cut hopes

The Bank of England today said inflation was projected to rise above 2.5% by the end of this year making it less likely that interest rates will come down.

In its quarterly inflation report, the Bank said inflation is expected to move above the Treasury target by the end of this year, dip slightly below the figure towards the end of next year, and edge back up towards target in two years' time.

"Given the new projection for inflation, the (Bank's monetary policy) committee decided at its meeting last week to leave official interest rates at 4%," said Mervyn King, the deputy governor of the Bank of England.

Figures this week from the office for national statistics (ONS) showed that underlying inflation, which excludes volatile mortgage repayments, rose to 2.3% in the year up to October. That appeared to justify the Bank's decision to leave rates unchanged for the 12th successive month at the beginning of November.

The tone of the report suggested that the Bank is inclined to leave rates alone for the foreseeable future, analysts said.

"It suggests that, unless there is some substantive bad news over the next few months, rates are on hold at least until the February report," said HSBC economist, John Butler. "This report makes us more confident in our view that rates will stay at 4% throughout 2003."

The Bank, as it did in August, cited "significant risks" to the outlook for growth and inflation, and indicated "prompt action" may be required to boost the economy.

First, the Bank said, US consumer spending might falter and the euro area remain sluggish, thus threatening the global recovery. Second, the boom in house prices might continue for some time "leading ultimately to a more abrupt slowdown in both house price inflation and consumer spending growth".

Finally, the Bank warned that the impact on wages and prices from increases in national insurance contributions - due next spring - might be greater than anticipated.

"The crystallisation of any of these risks could have material implications for the prospect for growth and inflation, and thus for policy," the Bank said.

Overall, it saw the risks to growth weighted to the downside and inflation slightly to the upside.