BOE Sees Inflation Strengthening End-2015 After Temporary Slump

The Bank of England said inflation will breach its target in three years, signaling it may have to raise interest rates faster than investors currently anticipate. 

While the inflation rate may drop below zero in the coming months from 0.5 percent currently, the BOE blamed this on oil prices and said domestic pressures are building.

In its quarterly Inflation Report on Thursday, it sees inflation at 2 percent in two years and 2.2 percent at the end of its three-year forecast period.

In a letter to Chancellor of the Exchequer George Osborne, BOE Governor Mark Carney said the Monetary Policy Committee doesn’t want to wait too long before trying to get inflation back to its goal, and will aim to reach the goal once the impact of the oil-price slump abates.

“Given the nature of the shocks affecting inflation, the MPC judges it appropriate to set policy so that it is likely that inflation will return to the 2 percent target within two years,” Carney said in the letter.

The BOE also noted risks to the economy, including from the euro area, and Carney said any rate increases are likely to be limited and gradual.

The governor said that the MPC could lower the benchmark rate even further or restart asset purchases if downside inflation risks materialize, adding that banks are now better placed to withstand a rate cut without harming the supply of credit to the economy.