BANK of England policymakers signalled borrowers could face a hike in interest rates to 6% before the end of the year. The Bank’s key quarterly inflation report – the biggest indicator on the future direction of interest rates since May – suggested a further rate rise could be needed this autumn to bring inflation back to the Government’s 2% target within two years. The forecast showed the Consumer Prices Index (CPI), the official measure of inflation, is expected to remain above target in the near-term as higher oil prices put upward pressure on the cost of living, even with a further hike in rates taken into account. The news will come as a blow to borrowers, who have already been hit with a quick-fire series of five rate rises over the past year. The increase to 5.75% last month saw the cost of borrowing reach its highest level since March 2001. However, markets expect rates will peak at 6% early next year, easing back throughout 2008 and 2009. The Bank’s report said the recent heightened volatility in financial markets and the tightening of credit on fears over US sub-prime mortgages had eased the upside risks to inflation. Yesterday’s forecast has been eagerly anticipated by economists amid the uncertainty to inflation and the economy following the recent floods and with stock markets remaining unusually choppy. Fears over food inflation – said to be rising as a result of crop damage from the June and July floods – has also cast doubts over the CPI. The Bank has been struggling to bring inflation back to target for more than a year now. In March, CPI reached 3.1% which was its highest level for at least a decade. CPI has since been falling back, thanks largely to lower energy bills but official figures for June showed that the rate of inflation had only slowed to 2.4% – less than many economists expected. Minutes of the Bank’s August rates’ meeting, when rates were kept on hold, are due out next week and are expected to shed light on the possible timing of a further rate hike. Bank of England governor Mervyn King said there was greater-than-usual uncertainty about the outlook for inflation. He added: “The main upside risk to inflation is that, with a limited degree of spare capacity, businesses may be more confident about raising prices than assumed in the central projection. “And continued strong growth of the world economy may put further upward pressure on commodity and other import prices.” Based on current City expectations for interest rates of 6%, the Bank said its central projection was for CPI inflation to fall back to around the target over the next month or so, before settling close to the 2% target for the remainder of the forecast period. Mr King said: “Oil prices have risen sharply in the past three months so, near term, the projection is a little higher than in May. Further out, the projection is a little lower, reflecting the more pronounced slowdown in demand growth. The governor said the Bank’s monetary policy committee would monitor “developments carefully” to judge what action may be required to keep inflation on track to meet the 2% target. | 
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