Bank of England sees CPI at 1.7% in 2 years, rate hikes ahead

British inflation is just as likely to be above or below target in two years if interest rates rise as markets expect, the Bank of England said on Wednesday, opening the door to tighter monetary policy.
The report is likely to reinforce expectations the BoE will start hiking rates soon from a record low 0.5%, possibly as soon as May, given that inflation is double its 2% target, and the economy is seen on the road to recovery.
The central bank's February Inflation Report showed consumer price inflation spiking up to between 4 and 5% in the middle of this year before falling back to around 1.7% in early 2013, a higher forecast profile than in November.
The Bank said its forecasts were based on the assumption that interest rates would rise to 1% by the end of this year, hitting 2.1% at the end of 2012.
"Under the assumptions that Bank rate moves in line with market interest rates … the chance of inflation being either above or below the target in the medium term are judged to be broadly balanced," the BoE said.
The report showed the Monetary Policy Committee was still unusually divided about the prospects for Britain's fledgling economic recovery and the path of inflation, although the risks to growth were on the downside and on the upside for inflation.
The MPC predicts a bumpy ride for the economy this year, with its 2011 forecasts for growth lower than those in its November quarterly forecasts, but it is seen picking up to around 3% in the medium term.
"Expansionary monetary policy, combined with further growth in global demand and the past deprecation of sterling should ensure that the recovery in the UK is maintained," the BoE said.
"But the continuing fiscal consolidation and squeeze on households' purchasing power are likely to act as a brake."
Minutes to January's policy meeting showed two MPC members voted to raise rates that month, indicating a shift towards a more hawkish stance.