Lower inflation looks likely

The two increases in base rates since November have improved the chances of getting inflation into the lower half of the 1-4 per cent target range by the end of this parliament, according to the Bank of England's latest quarterly Inflation Report released yesterday.

In its regular assessment of the outlook for prices, the Bank said retail price inflation, excluding mortgage payments, will be higher than it had previously predicted this year - partly because of higher indirect taxes. But it forecast the inflation rate will return to about 2.5 per cent at the end of 1996. Mervyn King, the Bank's economics director, said there was still a risk inflation would turn out to be higher than this, but the risk had been reduced by the base rate rises in December and last week.

Mr King said it was time to wait and see what the next batch of economic statistics showed. He said: ``The prospects for interest rates are uncertain. The framework is set up to form these judgements one month at a time.'' The Bank's assessment did not change City expectations about the need for another one or two interest rate increases later this year - and perhaps as early as April.

Mr King said there was no pre-planned programme of rises in base rates, and it was not possible to tell at what level interest rates would peak. He added that the inflation target would need to be restated at some point this year to extend it forward. Monetary policy aims to infuence inflation two years ahead.

Surveys by the CBI indicated that capacity utilisation in industry was well above average, and more firms planned to increase their prices. The CBI's regional survey, published yesterday, showed output has been growing across the country, with tight capacity emerging in several regions. Finally, cost pressures were pushing their way along the inflation pipeline.