Enlarge imageLONDON (Reuters) - Inflation would stand well below the two percent target in two years' time if interest rates rose as fast as markets predict, Bank of England forecast showed on Wednesday.
In its February Inflation Report, the central bank saw consumer price inflation at around 1.2 percent at the start of 2012, assuming market interest rates started to rise in the third quarter of this year.
The Bank, which froze its 200 billion quantitative easing programme last week, also forecast inflation would be below target even if rates stayed at the current record low of 0.5 percent, effectively leaving the door open for more easing.
As such, the report is likely to boost expectations that interest rates will need to stay low for longer than many analysts currently predict and may not rise before the end of the year at the earliest.
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The Bank report showed the economy recovering only very slowly, with output taking until around mid-2011 to return to pre-crisis levels. GDP growth is seen at a rate of around 3.5 percent in two years' time.
"The strength of the recovery is highly uncertain," the Bank said in its report.
Feeding into that uncertainty is the prospect of much tighter fiscal policy. An election is expected on May 6 and most analysts expect greater fiscal consolidation whoever wins that contest.
"The need for a significant fiscal consolidation is clear, but the nature and pace of that correction are uncertain," the BoE said. "And it is unclear how much further households will retrench given the adjustment in their spending and saving already seen."
(Reporting by Sumeet Desai and Matt Falloon)
