Hopes of a near-term cut in the cost of borrowing took a knock today with the publication of the Bank of England’s latest forecasts on inflation and growth.

In its quarterly Inflation Report, the Bank predicts that higher asset prices and increased consumption will help economic growth move "above" its historical average in 2006, while inflation will remain close to its 2.0 per cent target throughout the next two years.

Analysts said the Report gave the impression that the Bank is content to keep rates unchanged at 4.50 per cent, at least for the time being. This analysis was supported by foreign exchange traders with sterling moving higher against both the dollar and euro.

Mark Miller, an economist at HBOS, said the report was "a little more hawkish" than the market was expecting and that he was particularly surprised at the Bank’s confidence about the outlook for growth.

He added that the market had "got a bit ahead of itself" after yesterday’s weaker-than-expected inflation figures by immediately assuming that this could result in a cut in interest rates.

But other analysts pointed to some of the language used in the report to suggest that there remains a moderate leaning towards lowering borrowing costs.

Howard Archer, chief UK economist at Global Insight, said: "Indications that there is at least a modest easing bias within the Monetary Policy Committee is provided by the fact that the risks to the growth forecasts are seen to be a ‘little to the downside’ while the risks to the inflation outlook are seen as ‘broadly balanced’.

Speaking at a press conference after the release of the report Bank Governor Mervyn King was keen to emphasis the potential fallibility of the Bank's predictions.

"Before any of you are tempted to get carried away with the flat profile for the central projection for inflation, let me remind you that the chance that inflation will remain so close to the target throughout the forecast period is negligible. As ever there are risks to the outlook in both directions."

He added that the Bank was "ready to take whatever action is necessary" to keep inflation on track.

"By highlighting the many risks and uncertainties currently surrounding the growth and inflation outlooks, the Bank is clearly giving itself full scope to act at any time," Mr Archer said

"We believe that the bank's central growth forecast is still on the optimistic side, particularly in the near term. Consequently, we expect the Bank of England to trim interest rates by a further 25 basis points by May."

John Butler, chief UK economist at HSBC said Mervyn King’s comments in the press conference suggested that he felt the news on activity over the past quarter had been stronger than expected.

"Mr King seems a long way from considering an interest rate cut. But he MPC’s forecast seems to point to another year of unbalanced growth, with upgrades to consumer spending but greater pessimism concerning investment.

"Those imbalances both domestically and globally still present a major risk and one that is unlikely to be resolved by interest rates alone. No change to our rate view, that the next move is down."

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