Bank set to meet inflation target

The Bank of England today hinted that interest rates may have peaked as it said it was on course to meet its inflation target assuming that rates remain unchanged.

The Bank's quarterly inflation report said the overall outlook has changed little in the past three months though the risks have shifted to the downside. The Bank's job is to hit the Treasury's inflation target of 2% two years out.

House price inflation had declined more sharply than anticipated in August, at the time of the last inflation report, the Bank said, and it projected a modest fall for a period. But the report said the outlook for house prices was "extremely uncertain".

"Lower house price inflation should restrain household spending growth, though the (monetary policy) committee believes that the link between house prices and consumers' expenditure is probably somewhat weaker than past relationships suggest."

The Bank left interest rates on hold at 4.75% for the third month in a row last week as five increases since November last year appear to have had the desired effect - particularly on the red-hot housing market. Recent data have also showed a weakening of economic growth and in consumer spending.

But in his opening statement before a press conference, Mervyn King, the Bank of England's governor, said: "The committee has had to balance the impact of weaker activity and house prices, on the one hand, against indications of stronger future cost pressures, on the other. Oil prices have risen further. Data released on Monday suggest that factory gate prices are increasing at their fastest rate for nine years ... Taking all these developments into account, the committee's central projection for the UK economy remains one of steady growth with low inflation, but with many uncertainties."

Analysts thought the tone of the report and that of Mr King's comments suggested that interest rates may stay unchanged for a while, although some believe that they may actually start falling next year as economic activity declines.

"The inflation report overall is perhaps a little more dovish than expected, suggesting that the Bank of England currently feels that interest rates may not have to rise much further, if at all.

Nevertheless, the Bank is clearly keeping its options open regarding future monetary policy developments, with Mr. King particularly highlighting the uncertainties surrounding both the growth and inflation outlooks in his press conference," said Howard Archer, chief UK economist at the consultancy Global Insight.

The pound fell back from a three-and-a-half month high against the dollar as the market anticipated no changes in borrowing costs for at least the next 18 months.