Bank hints at rates rise

The Bank of England today hinted that its next move on interest rates will be up as it raised its inflation and growth forecasts.

In its quarterly inflation report, the Bank said inflation was likely to hit its 2% target during 2006 and then climb higher, a slightly stronger inflation forecast than it made in its November report.

"The central projection is for demand pressures and higher import prices to push up inflation to slightly above the 2% target two years ahead, rising modestly thereafter," Mervyn King, the governor of the Bank of England, told a news conference.

This week, official figures showed inflation stayed at 1.6% last month, higher than the City had been expecting. In November, the Bank said it expected inflation in the first three months of this year to be 1.2%.

The Bank's monetary policy committee last week left interest rates at 4.75% for the sixth month in a row and analysts are split on whether the next move will be up or down.

"The overall tone of the inflation report modestly reinforces our expectations that the next move in interest rates will be up," said Howard Archer, chief economist with the consultancy Global Insight.

"Significantly, the Bank has modestly raised its growth and inflation forecasts, but has partly countered this by saying that the risks to both projections are slightly on the downside."

Mr King stressed that the outlook was still highly uncertain, particularly on the outlook for consumer spending on which he said recent figures had been distinctly mixed.

"Drawing strong conclusions about spending over the Christmas period is something we should all give up for Lent," Mr King said.

The inflation report said there was a downside risk to spending as the underlying momentum may be weaker than in its central projection.

"And it is possible that the slowing of house price inflation many have greater downward impact on consumption than in the central project," the report said.

Elaborating on this in his press conference, Mr King said of consumer spending and house prices: "This relationship is not stable, it moves significantly from one period to the next and it's not a structural relationship. I don't think we've learned any more in the last few months, indeed I would say that as far as consumer spending is concerned the evidence we have about its behaviour in the last couple of years is distinctly mixed."

Growth was still seen as robust and close to trend, picking up at the end of the forecast period. The Bank's fan chart indicated growth of around 3% in two years.

The report lists the main risks to its central projection on growth and inflation as the prospects for domestic spending, wages, productivity, import prices, and the outlook for the world economy.

With so much uncertainty on where the economy is heading, analysts are agreed on one thing, that the Bank appears to be in no hurry to move on rates one way or another. Moreover, with a general election expected in May, any decision as politically sensitive as a rate rise would certainly be taken afterwards and not before.