British interest rates will probably need to rise one more time to keep inflation on track to hit its 2 per cent target, the Bank of England signalled today.
The central bank's quarterly Inflation Report showed CPI falling sharply in the coming months to dip below 2 per cent at the end of the year before picking up to the target at the two-year horizon.
This assumes that interest rates rise to 5.5 per cent in the second quarter. The BoE predicted that CPI inflation would clearly overshoot the 2 per cent target if interest rates were held at their current 5.25 per cent.
Risks to the forecasts were weighted to the downside in the near-term but to the upside further out and policymakers remain worried that wage demands are picking up and firms are more confident about raising their prices.
However, data earlier today showed average earnings rose by less than expected in the three months to December, which may ease policymakers fears.
The BoE, which left interest rates unchanged last week after three quarter-point hikes since August, also predicted strong growth this year.
GDP growth is expected to peak above 3 per cent in the middle of this year before easing back to around 2.8 per cent in two years as government and consumer spending slow.
The central bank also said that the recent period of labour market loosening may be coming to an end and indeed data earlier today showed the number claiming jobless benefits fell in January by its biggest amount in nearly three years.