Bank of England may further increase interest rates

The Bank of England has suggested that it may have to rise interest rates further in coming months in order to keep inflation on target at 2%.

In its quarterly inflation report, the Bank warns that inflation could rise as high as 2.7% without a rate rise.

Paul Niven, head of asset allocation at F&C Asset Management says: The report was keenly anticipated by the markets, following last week’s surprise quarter point hike, and gave investors a further insight into the Bank’s thinking over current and future economic trends.

The detail of the report shows that the Bank now expects inflation to reach 2.7% by the end of this year but anticipates that, on a two year view, that inflation will fall back towards the target of 2%.

Governor of the Bank, Mervyn King stated that it is ‘odds on’ that the Bank will have to write a letter to the Chancellor in the next two years, explaining why inflation has breached 3%. King predicts a 50% chance of such a letter being written in the next six months.