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Last Updated: Wednesday, 10 May 2006, 12:21 GMT 13:21 UK
Bank hints at future UK rate rise
Bank of England governor Mervyn King
Bank governor Mervyn King said inflation should stay close to target
UK inflation will meet its 2% target over the next two years assuming there is a slight rise in interest rates, the Bank of England has said.

In its quarterly inflation report, the Bank said inflation would move above 2% in the short term as a result of higher gas and energy bills.

However, it is expected to be back on target within two years.

Despite the Bank's comments, analysts said a rise in rates before the end of the year appeared unlikely.

The latest report follows the Bank's recent vote to keep interest rates at 4.5%, for the ninth month in a row.

Speculation had been rising that the Bank may seek to raise rates in the summer to head off inflationary pressures.

Price squeeze

"The inflation report describes a benign central view of steady growth with inflation remaining close to the target," said Bank of England governor Mervyn King.

Benign UK inflation effectively rules out a UK rate hike for a considerable period
David Brown, Bear Stearns International

One issue of concern has been rising energy prices, and the subsequent impact higher utilities bills could have on consumer spending.

"Clearly the rise in energy prices in the short term will add to the squeeze we've seen in the last year or so and is more likely to discourage consumer spending, but we've also seen a rise in asset prices and share prices," Mr King said.

Commenting on the housing market, Mr King said that house prices were "high" by any standard, whether in relation to average earnings or income.

The Bank said consumer spending was forecast to grow slightly below its long-run average over the next couple of years.

Its projection for GDP growth was that it should continue to grow at its long-run historical average.

The projection was based on "the assumption that official interest rates move in line with market expectations of a small rise in rates over the next year," the Bank said.

But analysts said the tone of the report suggested it could be many months before any rate rise is needed.

"While there is no argument for lower rates in the [Bank's] book, equally benign UK inflation effectively rules out a UK rate hike for a considerable period," said David Brown, chief European economist at Bear Stearns International.

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