The Bank of England keeping an eye on inflation

Government Could Miss Inflation Target

In its authoritative Quarterly Inflation Report, the Bank said its central forecast was that the target of 2.5% would be achieved, but added that the risks were "on the up side".

However, interest rates are likely to remain on hold for the time being as the Bank said it was time to "take a pause to assess the risks".

The central forecast is lower than that given in the May quarterly report. The Bank now sees the outlook for inflation as "favourable".

It said economic growth was likely to fall back later this year and in 1998 as the strong pound and the measures taken in the Budget would begin to bite, while the flood of building society conversion windfalls would dry up.

However the Bank does not predict a recession. Its economists believe that output will pick up again in about two years' time.

In perspective: inflation since 1975

On Tuesday the Government had insisted its economic policy was still on track despite inflation hitting its highest level for two years, at 3.3%. The headline rate is now at its highest level since September, 1995, when it was 3.9%.

Monetary Policy Committee Unanimous on Rate Rise

The minutes of the committee's meeting have now been published, and show that the six members debated whether rates should be raised by 0.25% or 0.5%, before opting for the lower rate.