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Last Updated: Wednesday, 9 August 2006, 10:51 GMT 11:51 UK
Bank hints at further rate rises
Bank of England building
The Bank has raised its forecasts for economic growth
The Bank of England has hinted that UK rates may have to rise further in coming months in order to keep inflation on target at 2%.

In its quarterly inflation report, the Bank said inflation could rise as high as 2.7% without a rate rise.

But while the Bank said it had raised its expectations for economic growth, it warned that high energy bills still posed a risk.

The news comes a week after the Bank raised rates to 4.75% from 4.5%.

The Bank's governor, Mervyn King, said the Monetary Policy Committee had opted to raise rates "against a background of firm growth and limited spare capacity and with inflation likely to remain above target for some while".

"It [the MPC] remains ready to take whatever action might be necessary in the future," he added.

Further rises?

However, experts said that uncertainties raised by the report made it unlikely that the Bank would opt for more than one more rise in rates.

There remains great uncertainty about future energy prices
Mervyn King, Bank of England

"There is a warning that rates may have to rise, but it will depend on the domestic and worldwide economy over the next few months," said Investec economist Philip Shaw.

Latest figures from the Office for National Statistics (ONS) showed Consumer Price Index inflation rose to 2.5% - its highest level since similar records began in May 1997.

Higher fuel bills, as a result of rising oil and gas prices, were behind much of the rise.

Looking ahead, the Bank said it expected soaring energy prices, as well as rising university tuition fees to push inflation above its 2% target.

The Bank said the pick-up in inflation was "somewhat more marked" than in its May report.

"There remains great uncertainty about future energy prices, especially in the light of political tensions in the Middle East, and inflation is likely to be volatile over the coming months," Mr King added.

The bank has had to balance controlling inflationary pressures against a possible slowdown in consumer spending with its rate rise.

Picking up

But the UK economy has put in a strong performance recently, recording its strongest growth in two years between April and June, while the housing market has picked up significantly over the past year.

The report forecast that the UK economy would continue to recover as consumer spending picked up, investment recovered and trade provided a boost.

The forecast came despite figures, released earlier on Wednesday, showing that the UK's trade gap with the rest of the world had narrowed less than expected as both imports and exports fell.

The Office for National Statistics said that the world trade gap narrowed to 6.46bn in June from an upwardly-revised deficit of 6.98bn in May - against forecasts of 6.2bn.

Analysis of Governor Mervyn King's comments

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