Bank Of England dampens hopes of interest rate cut

Further rate cuts for struggling home owners and borrowers look unlikely this year as policymakers battle to control runaway inflation, the Bank of England signalled today.

The bank’s latest quarterly inflation report suggests the Consumer Prices Index (CPI) will remain well above its 2% target in two years’ time if interest rates fall up to twice more this year to 4.5% as markets expect.

Even one more cut this year is by no means certain as the bank’s forecast shows CPI undershooting the 2% target by the narrowest of margins in two years’ time if borrowing costs remain unchanged at 5%.

The warning comes in a gloomy set of forecasts which predict CPI could spike as high as 3.7% this year and remain above 3% until well into 2009 – prompting a succession of open letters to the Chancellor from Bank Governor Mervyn King to explain the rise.

With inflation under pressure from surging oil, food and household energy bills - as well as a weaker pound – growth is at the same time expected to fall as low as 1% this year.

This fall is well below official Treasury predictions and comes as the credit crunch bears down on lending, house prices and consumer spending, slowing the economy.