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BoE August inflation report hints at rate increase to 6 per cent

The Bank of England’s latest quarterly inflation report has hinted that UK interest rates may need to rise one more time if inflation is to be brought down to the 2 per cent target.

The report says that inflation should return to 2 per cent by 2009 if rates move in line with market expectations.

UK inflation stood at 2.4 per cent in June, down from 3.1 per cent in March. But the report says that inflation was likely to miss the 2 per cent target if interest rates remained at the current 5.75 per cent level.

According to reports, BOE governor Mervyn King insisted today in a press conference following the publication of the latest report that credit problems in the US did not amount to an international crisis.

New Star economist Simon Ward says that although the MPC retains a tightening bias, the projections are slightly less hawkish than in the February and May reports.

Ward adds: “Key changes are a downward revision to growth expectations and a forecast that inflation will fall below target after two years if the Bank rate is raised again. Our MPC-ometer continues to favour rates staying on hold through to the year-end, but the Committee will need to see more evidence of consumer / housing market cooling and will be sensitive to any adverse news on inflation expectations.”

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