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.