Inflation outlook points to Bank keeping interest rates on hold

The Bank of England cut its inflation forecasts yesterday in a sign it no longer sees the need for another rise in interest rates to take the base rate above 5 per cent.

Mervyn King, the Governor, said risks to the outlook were "broadly balanced" and sidestepped questions over rising house prices and an imminent new year pay and bonus round.

Its forecasts showed inflation falling back to target more swiftly than in its August Inflation Report. It also showed that if rates rose another quarter-point as the markets expect, inflation would eventually fall below its 2 per cent target.

The pound fell to an 18-month low as traders unwound some of their bets of a rate rise in February. "The projections suggest that, at least for now, the Bank believes it has done enough," Karen Ward, a UK economist at HSBC, said.

However, many analysts said the Governor had left the door open for another rise, perhaps in February, although it would require an inflationary spike to jog his elbow.

Geoffrey Dicks, the chief UK economist at Royal Bank of Scotland, said: "For February the Governor did his best to appear completely agnostic in what, at this distance, is a very finely balanced decision."

In his briefing to unveil the report, Mr King said the most significant change between August and this month had been the 23 per cent fall in oil prices. "The main risks to the inflation outlook in the medium term surround the behaviour of pay growth and any recovery in profit margins as energy price inflation falls," he said.

Official figures on Tuesday showing a rise in headline inflation to an eight-year-high of 3.7 per cent last month had fuelled fears of a steep round of new year pay claims. But Mr King played down the concerns. "In terms of the next wage round, we will actually have to wait and see," he said.

His remarks came as official figures showed average earnings in the three months to September rose 3.9 per cent on a year earlier, down from 4.2 per cent in the previous three-month period. Unemployment continued to rise. The number on jobless benefits rose 1,200 in October, while the ILO jobless rate picked up to 5.6 per cent in the three months to September - the highest since May 2000.

Mr King also played down the danger from house prices, despite figures from leading lenders showing a pick-up in the rate of annual property price inflation. Figures from the Royal Institution of Chartered Surveyors today showed house prices rising at their fastest pace in more than four years and enquiries rebounding as confidence returned despite August's rate rise.

On the economy, the Bank saw growth over the next two years turning out stronger than it had predicted in August. It forecast another robust outturn for the fourth quarter, and expected growth to run at around 3 per cent next year before dipping just below in 2008.

The Government unveiled detailed plans to grant full independence to its statistics operations. The announcement, in the Queen's Speech, included plans to create an independent board as a non-ministerial department.