Inflation will remain above the Government’s 2 per cent target for at least 12 months and is likely to rise to 5 per cent this year while interest rates look set to stay on hold until 2013.
The latest figures from the Office for National Statistics show inflation stood at 4.2 per cent in June, after falling from 4.5 per cent in May.
In the Bank’s August’s inflation report, published last week, the monetary policy committee says inflation is likely to rise in the coming months before falling back in 2012 and 2013.
It says: “There is a good chance that inflation will reach 5 per cent later this year, boosted by utility price rises, and reflecting the continuing impact from past increases in VAT and in oil and other import prices.”
The bank cut its growth forecast from 1.8 per cent to around 1.5 per cent, due to the eurozone debt crisis and the threat to US economic growth.
John Charcol senior technical manager Ray Boulger says: “It looks like base rate will not go up until 2013 here. Bearing in mind the MPC has got two remits – to keep inflation to target and the other to facilitate employment in the general economic scenario – and the bank obviously feels it is able to keep base rate where it is and achieve this.”
Capital Economics senior UK economist Vicky Redwood says: “The MPC’s growth forecasts still look optimistic to us, particularly in light of the further market volatility seen since the committee signed off the report last week.
“Accordingly, we still think that keeping interest rates low will not be enough to generate a strong recovery and more quantitative easing will be necessary.”