Bank of England signals rate increase

Bank of England Governor Mervyn King said that
inflation remains “uncomfortably high,” and officials signaled they may need to
raise interest rates later this year even as the economy struggles to build
momentum.

“The recent pattern of revisions to the
projections over the next year — downward to growth and upward to inflation —
has continued,” King told reporters in London today. Inflation “remains
uncomfortably high and well above the 2 percent target. And there is a good
chance that, if utility prices rise further later in the year, inflation will
reach 5 percent.”

The pound rose after the release of the
bank’s forecasts, which showed that a quarter-point interest-rate increase by
the end of the year may be needed to control inflation, which officials see
“markedly higher” in the short-term than they did in February. The central bank
kept its benchmark rate at a record low of 0.5 percent last week to aid
economic growth.

“The most likely outcome for growth in the
medium term is somewhat weaker than in the February report, reflecting a more
gradual recovery in consumption and a less pronounced boost from net exports,”
the bank said in its Inflation Report published today. Inflation “is more
likely than not to remain above the 2 percent target throughout 2012.”

The pound rose after the Bank of England report,
and traded at $1.6453 as of 4:07 p.m. in London, up 0.5 percent since
yesterday. The yield on the benchmark two-year government bond gained 6 basis
points today to 1.076 percent.

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