The Bank of England raised its inflation forecast and signaled policy makers may need to keep interest rates higher than investors currently predict.
Inflation will overshoot the central bank's 2 percent goal in two years and risks breaching the government's 3 percent limit before then, the bank said in London today. The bank based its forecasts on investors' bets for the benchmark interest rate to fall to 4.5 percent by the end of the year.
The pound rose and rate futures climbed. Bank of England Governor Mervyn King is weighing the need for further rate cuts after the bank reduced borrowing costs last week for the second time in three months to cushion the economy from a slowdown. While the U.S. Federal Reserve lowered its benchmark at the fastest pace since 1990 last month, U.K. policy makers have been more cautious as they seek to control inflation.
``Inflation is, in the medium term, more likely to be above the target than below'' if rates fall as investors forecast, King told reporters in London today. King said it's ``odds on'' inflation will exceed 3 percent and he'll have to write a letter of explanation to Chancellor of the Exchequer Alistair Darling.
According to Bloomberg, the Bank of England rate is 5.25% -- hardly a painful level.