The rate could increase to as much as 5.75 per cent to bring inflation back under control. The bank said: 'There is an unusual degree of uncertainty about the outlook for inflation. The risks are judged to be balanced in the near term and weighted to the upside in the medium term.'
Last week, the Bank of England raised the interest rate by a quarter of a percentage point to 5.5 per cent, in an effort to slow prices. It is the fourth time that borrowing costs have been increased since August last year. The increase came after the bank was obliged to write a letter to the Government outlining why the Consumer Prices Index (CPI) inflation had risen above 3 per cent.
The UK's latest inflation figures, released by the Office for National Statistics earlier this week, said that the CPI inflation rate slowed to 2.8 per cent in April, down from 3.1 per cent in March. This was helped by price cuts in the household goods sector and lower energy bills.
Bank of England governor Mervyn King said: 'The crucial question for the bank is where inflation is likely to be once energy prices have settled down.' According to the report, the contribution of domestic energy price inflation is set to fall sharply over the rest of this year.
However, the bank added that the outlook for CPI inflation depends on what happens to other prices and whether companies' pricing decisions are more responsive to cost pressures.
The bank predicted that inflation would be as low as 2 per cent in two years' time.
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