Interest rates won't fall as sharply this year as financial markets have been predicting, the Bank of England signalled on Wednesday, although at least one more cut in borrowing costs is probably still on the cards.
The Bank's quarterly inflation report showed inflation some way above the central bank's 2 percent target in two years if rates fell as far as 4.5 percent by the end of 2008. But inflation would probably be below 2 percent if they stayed at their current 5.25 percent.
"The basic point is the Bank is saying that interest rates are not going to fall as far and as fast as markets currently seem to think," said Jonathan Loynes, chief UK economist at Capital Economics. "The indication is that it's going to proceed with bringing interest rates down at a fairly steady pace."
Sterling gained ground versus the dollar as investors cut bets on how many further cuts in borrowing costs are in the pipeline but 53 out of 54 economists polled by Reuters predicted the Bank would cut again by the middle of the year.
Financial markets had been betting the Bank would follow up last week's quarter percentage-point rate cut with three more reductions by year-end to shore up an economy buffeted by the global credit crunch.
Bank of England Governor Mervyn King said there was a possibility the economy could grind to a halt at some point at least one or two quarters this year.
INFLATION FEAR
But policymakers are also clearly worried about rising inflationary pressures due to strong food and energy prices. They see the CPI rate reaching 3 percent by the middle of this year, just shy of the level which would force Governor Mervyn King to write an explanatory letter to the government.
