The Bank of England thinks that inflation in the UK will return towards target quicker than it anticipated just three months ago, with the headline rate actually dipping below 2 pct if one more rate rise materialises. In its quarterly economic projections, the central bank also said it thinks that the UK economy will grow by more than it anticipated in the August Inflation Report. The BoE's rate-setting Monetary Policy Committee, which last week raised its key repo rate a quarter point to a five-year high of 5.00 pct in order to rein in inflationary pressures, said it expects the annual CPI inflation rate picking in the near-term to a peak of around 2.7 pct towards the end of this year before easing back quite dramatically towards the 2.0 pct target over a two-year horizon. By the end of the period, the central projection is CPI inflation to be just below the target, helped by lower oil prices and the pound's recent gains which will work to depress imported inflation. "Under the central projection, inflation rises in the near-term and then falls back, settling around the target over the medium-term," it said. "Inflation returns to target a little more rapidly than in the August Report," it added. The forecast is based on market expectations on the likely path of interest rates, with the average rising to a peak of 5.2 pct in the the third quarter of 2007 and ending the two-year forecasting period at 5.0 pct. This suggests that the BoE may raise the cost of borrowing once more but possibly not as soon as many Bank watchers have been predicting. If nominal rates are left unchanged, the annual rate is likely to be just above the 2 pct target at the two-year forecasting horizon, the MPC said. In August, the MPC said the annual rate could well rise to above 3 pct, at which point the BoE's governor Mervyn King would have to write to the Chancellor of the Exchequer Gordon Brown explaining why CPI inflation had deviated by more than one percentage point from the 2.0 pct target. In August, the MPC said CPI inflation was unlikely to return to target within the two-year horizon. On growth, the MPC said GDP is likely to increase at a steady rate over the two-year horizon and averaging above 2.5 pct, but below 3 pct over the period. That means the economy will continue to grow, as it has done over the last four quarters, at around its long-run average. By the end of the two-year forecasting horizon, it anticipates GDP growth to edge down slightly as government spending slows. As with the inflation projection, the growth forecasts are based on market rates. If nominal rates are left unchanged then GDP is slightly firmer. The Bank stressed that there are significant uncertainties surrounding both its inflation and growth forecasts, adding that the risks are broadly balanced, but like in August, there is greater-than-usual uncertainty over the inflation outlook. It noted rapid money growth and credit, the momentum in consumption and investment spending, global economic activity, the degree of slack in the economy and the outlook for wages. The MPC reiterated its view that there is relatively little spare capacity in the economy as a whole, and warned that the recent pick-up in RPI inflation may lead to upcoming wage pressures. It also noted that businesses may use the opportunity of lower oil costs to rebuild margins.