Bank of England hints interest rates have peaked

Expectations that interest rates might come down this year grew yesterday after the Bank of England signalled it was unlikely to raise them in the near future.

The governor, Mervyn King, presenting the bank's quarterly inflation report, admitted that the monetary policy committee had been surprised by the weak run of economic data in the past couple of months. The report lowered its previous forecast of economic growth over the next two years and said the risks to growth remained "to the downside".

Financial markets moved to price in an interest rate cut by December while the pound dipped on foreign exchanges.

The report gave a flatter profile for inflation in two years - the MPC's preferred horizon - than the February report had, with inflation, now 1.9%, slightly above its 2% target in the next few months before set tling around target for 18 months or so.

Until a month ago, many City economists had expected the MPC to increase rates to 5% at this week's meeting but weaker data on consumption and manufacturing since then has changed many minds. "The speed of the slowdown did come as a bit of a surprise," said Mr King, though he stressed that the MPC thought consumer spending may recover during the year as employment growth remains robust.

The report made clear the MPC was aware that the deceleration in house price growth "may be associated with a more prolonged slowdown".

Mr King said the MPC had an open mind about its next move in rates, which would depend on how the economic data developed. He warned against reading too much into data showing a plunge in manufac turing output in March, saying the series was very volatile. The services sector, which accounts for about 70% of the economy, seemed to be growing strongly.

John Butler, economist at HSBC, said the Bank was trying to send a signal that it would respond in either direction on rates as needed. Others thought the softer tone compared with February opened the door to lower rates.

"If the economic data maintains the recent softer note, we argue that the next move in rates will be lower, and retain our view of an August rate cut," said Ciarán Barr of Deutsche Bank in London.

· The Office for National Statistics reported a smaller than expected goods trade deficit of £4.4bn in March, the lowest for a year, thanks to a 7.5% jump in exports outside the European Union.

The United States also enjoyed an improvement in its trade position in March as exports rose and imports fell.