Inflation report opens way for rate cut

The Bank of England is on course to meet its two-year inflation target of 2%, it said today, leaving the door ajar for a rate cut early next year.

In its quarterly inflation report, the Bank's monetary policy committee (MPC) said that the consumer price index was likely to fall below its target in the first year of its forecast as the effect of higher oil prices wears off.

Further ahead, inflation is expected to pick up as growth regains momentum and will hit 2% two years hence and remain close to that thereafter. The Bank's forecast on inflation is a little lower than its August projections.

"It is too early to be sure that the recent pickup in inflation will not lead to further second round increases in pay and prices, although the committee draws comfort from the observation that so far neither inflation expectations nor earnings growth have risen," said the governor of the Bank of England, Mervyn King.

"The committee will be monitoring developments in those areas carefully."

In the latest inflation data, the Office for National Statistics reported yesterday that the consumer price index had fallen for the first time for over a year in October. The ONS said the annual rate of increase slowed to 2.3% last month from a high of 2.5% in September.

Analysts said the tenor of the report raised the possibility of a rate cut early next year.

"The market has taken the view that this report is towards the dovish end of possible outcomes with rate expectations and sterling moving lower," James Knightley of ING Financial Markets told Reuters. "We agree with this and believe it does open the door for a February rate cut, especially since there "is a range of views among members".

The Bank's monetary policy committee last reduced borrowing costs in August, when borrowing costs came down to 4.5% from 4.75%. The MPC was split 5-4, with Mr King voting with the minority, a rare position for the governor to be in.

At his press conference, Mr King characteristically emphasised the uncertainty of the economic outlook and its implications for interest rates.

"We don't anticipate our future decisions. There is, as I said, a great deal of uncertainty at the moment," he said.