Bank hints at future rate rises

The Bank of England may increase interest rates to control inflation

UK interest rates are set to rise further, the Bank of England has hinted after it forecast inflation would rise above the official 2% target next year.

The current strength of the housing market and UK economic growth will push prices higher, the Bank predicted in its quarterly inflation report.

Inflation is expected to climb above 2% in early 2005, hitting levels close to 2.5% by the end of 2006, the Bank said.

Interest rates were raised last week, by a quarter percentage point to 4.25%.

The view that... further increases in interest rates may be necessary, is not an unreasonable one Mervyn King, Bank of England governor

It was the third rise in the cost of borrowing since November, and analysts expect further rises over the coming months.

Futures markets are pricing in official rates of about 5% by the end of the year.

Housing market 'to slow'

The consumer price index (CPI) measure of inflation is currently just 1.1%.

But the Bank of England governor, Mervyn King, said: "The view that the market has been taking lately, that further increases in interest rates may be necessary, is not an unreasonable one."

The question now is whether they (the Bank) might want to speed up the process to one rise every two months instead of one every three Geoffrey Dicks, RBS Financial Markets

However, he added: "I don't know where interest rates are going because that will depend on unfolding events in the future."

Mr King said house price inflation was set to slow down sharply over the next two years "although house prices may well continue to rise strongly in the near term".

Adam Chester, chief economist at Halifax bank, said: "The May inflation report is consistent with the idea that the Bank of England still has more work to do in raising interest rates."

"The market has priced in higher interest rates and this report did not do anything to challenge that," he said.

Other analysts saw the Bank's comments as a sign it may accelerate rate rises in coming months.

"They gave a clear signal that they haven't finished raising rates," said Geoffrey Dicks, chief UK economist at RBS Financial Markets.

"The question now is whether they might want to speed up the process to one rise every two months instead of one every three."