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UK Inflation to Stay High if Interest Rates Fall: BOE

Reuters
Wednesday, 14 May 2008 | 5:42 AM ET

British inflation will shoot up over the next year and remain above the 2 percent target in 2 years if rates fall by half a percentage point as markets expect, the Bank of England's new forecasts showed on Wednesday.

The central bank's quarterly inflation report showed that inflation peaking at around 3.7 percent in the third quarter of this year before slipping to around 2.25 percent in 2 years.

The report suggests that the aggressive monetary easing is not likely. But inflation is seen just below the target if rates are held steady, the chart showed.

Growth is seen slowing sharply over the year with an outside risk that the economy even contracts.

"The conflicting risks to inflation from a more prolonged slowdown in demand growth and from the persistently elevated inflation on inflation expectations have both increased since the February report.

Overall, the balance of risks is presently judged to lie to the upside," the report said. It highlights the dilemma faced by policymakers as they try to juggle slowing growth and rising inflation.