Bank says inflation will stay close to target

Hopes of an early cut in interest rates were today fading as the Bank of England stuck to its forecasts for growth and inflation.

In its quarterly inflation report, the Bank said inflation was projected to remain close to its 2% target over the next two years.

The Bank expected growth to pick up above its historical average in the near term, reflecting stronger consumer spending, before easing back in the second year of its forecasts.

Analysts said the report was more hawkish on inflation than expected and indicated that the Bank was in no hurry to cut interest rates. Borrowing costs have not changed since August, when the monetary policy committee lowered them to 4.5%.

"The immediate impression is that the inflation report is pretty neutral, and it does little to encourage the view that the MPC could trim rates in the immediate future," Howard Archer, of the consultancy Global Insight, said.

Although the Bank said its central projection was for inflation to stay close to its target, the governor, Mervyn King, remained cautious.

"Before any of you are tempted to get carried away with the flat profile for the central projection for inflation, let me remind you that the chance that inflation will remain so close to the target throughout the forecast period is negligible," he warned.

Mr King said there were some differences among the MPC's nine members over the Bank's central projections, but described those differences as "small".

In the last two MPC meetings, only Stephen Nickell has broken ranks with his colleagues to vote for a rate cut.

Mr King also emphasised the inflationary risks posed by high energy prices. While higher petrol and gas prices had not yet fed through to wage and salary claims, he said this could yet happen.

"The fact, so far, is that we've not seen evidence of significant second-round effects that worry us ... but we are in no position to say that they won't come through," he said.

Most analysts expressed surprise at the Bank's optimistic growth forecasts.

"The big picture here is that the Bank's forecasts for growth and inflation are different to consensus expectations for weaker growth and inflation short term," Alan Castle, of Lehman Brothers, said.

Official figures yesterday showed the annual inflation rate in January stood at 1.9%, below the Bank's 2% target. The unexpected dip sparked speculation that the Bank would have to consider a rate cut in order to achieve its target.

However, Mr King's comments indicated borrowing costs would stay on hold for a while. "Given the overall outlook and the balanced nature of the risks, the committee decided last week to leave interest rates at their present level," he said.

"But it remains ready to take whatever action is necessary in order to keep inflation on track."