Interest rates to be held as Bank of England seeks to lower inflation

Published on Wednesday 13 August 2008 12:03

INTEREST rates are likely to remain on hold for the next few months to bring inflation back down to the Government's target, the Bank of England signalled today.

In its latest quarterly inflation report, the Bank said with no rate cuts in the next two years inflation would most likely peak at just below 5% in the coming months before falling sharply next year and dipping below the official 2% target in two years time.

Inflation hit 4.4% last month thanks to soaring food and energy prices.

But it could top 5% in the months ahead if more gas and electricity suppliers follow EDF and British Gas's recent hefty price hikes, the Bank warned.

Rising inflation, higher unemployment and a further tightening of credit conditions is likely to see the rate of annual GDP growth slow to just above zero later this year and early next year before rising again, the report predicts.

This is a marked deterioration from the Bank's last inflation report in May, which forecast growth to fall to around the 1% mark at the end of this year.

Bank of England Governor Mervyn King said the UK faced the possibility of recession, defined as two successive quarters of negative growth.

King stated that with economic growth forecast to be broadly flat, it was "bound to be the case that there's a quarter or two of negative growth".

The inflation report also said there were "serious upside risks" to inflation in the coming months. This is despite a recent slide in oil prices to about 25% of their near 150 US dollars peak last month.

Additionally, the report said: "In the short term the profile for inflation will depend particularly on the size and timing of further retail gas and electricity prices."

The Bank added that inflation would fall back sharply to a little below the medium-term target of 2%, as the contributions of food and energy prices waned. In May, the report predicted inflation would remain above target into late 2010.