Bank turns dovish on inflation

THE Bank of England today bolstered speculation that interest rates have peaked, saying inflation is on track to meet its 2% target but the economy could be hit by sky-high oil prices and a rapidly cooling housing market.

Its latest quarterly forecasts show inflation - currently running at just 1.1% - picking up next year, reflecting stretched supply and higher import and energy costs.

It is expected to rise more slowly thereafter, hitting the 2% bull'seye in two years' time.

The forecast assumes the cost of borrowing stays at its prevailing 4.75%.

'The report appears to be more dovish than the neutral tone we had anticipated, though this outcome only reinforces our expectation that rates have already peaked,' said Daragh Maher, an analyst at Calyon.

The Bank sees the economy growing slightly below trend next year and then gradually picking back up to an annual rate of about 3% in 2006.

The forecast is broadly the same as August's, but the dip in growth occurs earlier and is less pronounced. House prices 'may fall modestly' for a period, but the outlook is 'extremely uncertain', it added.

Bank Governor Mervyn King was at pains to underline the uncertainty surrounding the projections, and said the risks are on the downside.

'These risks mean we cannot be confident of where the future path of output, inflation and hence interest rates will lie,' King said. 'When we say that, we mean it.'