The Bank of England on Wednesday fuelled speculation of further aggressive interest rate rises to come with a hawkish assessment of the outlook for British inflation. Inflation is currently well below target at just 1.1 percent, but the Bank said it would move above the official 2.0 percent target in two years time even after last week's interest rate rise to 4.25 percent. In comments in its quarterly inflation report that sent sterling rising and gilts falling, the bank warned markets might yet have to adjust their interest rate expectations upwards. Futures markets are pricing in official rates of around 5.0 percent by the end of the year and Reuters survey put the consensus forecast at 4.75 percent.
The Bank warned that even if interest rates rose as much as markets were expecting, inflation would still be "a little above target" in two years time. "The May Inflation Report is consistent with the idea that the Bank of England still have 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," said Adam Chester, Chief Economist at Halifax Bank. Bank of England Governor Mervyn King said that the situation was fraught with uncertainty. "How monetary policy will unfold over the next few months, I do not know. Nor, I suggest can anyone else."///