Inflation report puts rate cut on cards

Prospects of a further drop in interest rates have improved after the Bank of England revised forecasts for inflation downwards in its latest quarterly inflation report.

The Bank now predicts that UK inflation is set to remain below its target of 2.5% for most of the next two years. This means the Bank&#39s rate-setting Monetary Policy Committee is more likely to leave interest rates at 4% for the time being &#45 or even consider another cut.

Inflation is currently 1.5% – at danger of ducking beneath acceptable targets.

Mervyn King, deputy governor of the Bank of England, said the MPC is monitoring the situation closely, and “remains ready to take whatever action in either direction to meet the inflation target”.

Signs that the acceleration in house price growth may finally be easing off may also make a rate cut more likely. The Bank notes there is a “rapid rise” in house prices but says there are “tentative indications that the pace may soon start to slacken”.

The recent stock market turbulence forced the Bank to reign back its growth forecasts from the May inflation report. It says that despite some signs of recovery in the global economy, “sharp falls in global equity prices may dampen the recovery at home and abroad”.

The Bank also says growth in consumer spending is set to slow thanks to “slowing growth in disposable incomes and the recent sharp falls in equity wealth”.