Bank of England governor Mervyn King has played down the prospect of an imminent interest rate hike despite signalling borrowing costs would need to rise to curb inflation.
Mr King denied policymakers were paving the way for an early rate rise – but the Bank’s own inflation forecast indicated at least two increases are on the way in 2011 to bring inflation to target within two years.
The report also revealed a downgrade to this year’s growth forecast, although the Bank said the UK should avoid a double-dip recession.
Following publication of the report, Mr King said while it was “clear” rates will have to rise from their current historic low of 0.5% at some stage, the path of monetary policy was not a foregone conclusion.
He said: “Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise. That decision has not been taken and won’t be taken until we get to the next meeting, or the following meeting – it may be many quarters before we do anything.”
The Bank’s report said economic growth was set to resume following the shock 0.5% contraction at the end of 2010, but it also predicted UK growth just below 2% on an annual rate for much of 2011 – weaker than the 2.5% assumed in its November forecast.
The report confirmed inflation is expected to soar close to 5% before falling to around the 2% target in 2012 – but this is based on interest rates rising in line with market expectations, starting as early as the second quarter.
The market expects rates to reach 1% by the end of the year and the report warned that if the Bank took no action, inflation would still be above target in two years’ time.
Mr King said: “It is clear that at some point Bank rate will have to go up. Anyone making long-term financial decisions should not expect the Bank rate to be at these low levels indefinitely.”
Howard Archer, chief UK and European economist at IHS Global Insight, said: “The interest rate outlook remains very uncertain and whether or not the Bank of England acts by May will depend on how well the economy performs over the coming weeks as the fiscal tightening really kicks in. We fully acknowledge that a move is highly possible by May but for the time being we are sticking with the view that the Bank of England will hold fire until the second half of the year.”