Rates rise forecast for this year

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The Bank's latest forecasts suggest some City experts may have been too hasty in ruling out a hike in interest rates this year.

A recent run of weak economic data prompted some economists to predict rates will remain at a record of low of 0.5% for all of this year.

However, the Bank's latest projections show that inflation will return to its 2% target over the next two years if rates rise twice this year.

Most commentators said this suggests the Bank will raise rates in November, although some have not written off an August hike.

It is further evidence of the uncertainty facing UK homeowners as the UK economic recovery makes unpredictable progress.

Jonathan Loynes, chief European economist at Capital Economics, said the report endorsed expectations of some policy tightening later this year.

But he warned the inflation forecasts are based on "optimistic" growth assumptions of just below 2% this year and around 2.5% in 2012.

Mr Loynes said: "If we are right in expecting weaker growth in the face of the fiscal squeeze - not to mention falls in oil and commodity prices - inflation could fall back further than the Bank expects."

Howard Archer, chief UK and European economist at IHS Global Insight, said the report suggested rates were more likely than not to start rising in late 2011.

He said: "We believe the risks of the Bank of England tightening before or after November are evenly spread, with much clearly depending on how well the economy performs as the fiscal squeeze increasingly bites and whether or not wage growth shows any sign of picking up markedly in reaction to higher inflation and increased inflation expectations."

He added: "Mervyn King has highlighted that both the growth and inflation outlooks are highly uncertain, thereby suggesting that the Bank of England is keeping its options fully open on exactly when it will start lifting interest rates."

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, agreed and said the first rate move will likely take place in November.

But he added: "However, it is clear that this will not mark the beginning of a period of aggressive rate hiking - the forecast based upon constant interest rates shows only a modest overshoot of the target at the two-year horizon."

But Malcolm Barr, economist at JP Morgan Chase, said a rate hike in August was still in play.

He said: "While the report is consistent with less tightening than suggested back in February, the set up of the forecasts leans toward an August move rather than November or early next year."