Analysts that predicted a likely May rate rise were wrong footed yesterday, when King said: “Some people are running ahead of themselves. Its clear that at some point bank rate will have to go up. Anyone making long terms financial decisions should not expect bank rate to stay at these levels forever. But the judgment about timing …is a difficult one.”
King said inflation is likely to fall back to the 2% target set by the government during 2011, adding the inflationary pressure created by the rising cost of food, energy and the VAT increase is a temporary issue. The report suggests inflation will drop to 1.7% in two year’s time.
The Bank said it also expects wage levels to stay low after the rise in unemployment figures to over 2.5m reported yesterday.
A government spokesman said low rates would help the government see through its deficit plans, adding: “As a result of that plan, interest rates should be able to stay lower for longer.”