Inflation 'likely to have exceeded 3%' - MPC

UK inflation is likely to have risen to around 3.5%, exceeding the Bank of England's (BoE) target for the third time.

Today's announcement means BoE governor Mervyn King is likely to be forced to write again to the Chancellor to explain why inflation is still above the 2% target.

King attributed the upscale in forecast to the restoration of the VAT rate to 17.5% at the start of the year, higher petrol prices, and the continued depreciation of sterling.

He expects inflation to remain "significantly above the 2% target in the near term", though added "the extent to which CPI inflation will deviate from the 2% target in the medium term is highly uncertain".

Today's forecast is based on maintaing the current level of £200bn asset purchases, but King said he would not rule out an extension of the Government's asset purchase programme.

"It is too soon to conclude there will be no more asset purchases. We are keeping our options open and will be prepared to purchase more to keep inflation low", King said this morning.

He warned the recovery was "likely to be slow" with continued "uncertainty in the world economy", and output levels would take some time to return to pre-crisis levels.

The Bank predicts growth will reach about 3.2% in the second quarter of 2011, weaker than an earlier prediction of 4%.

Jeremy Cook, chief economist at World First, says: "Sterling has continued to weaken after the Bank of England's Inflation Report.

"Until the Bank of England and the market feels comfortable to rule out any further asset purchases through quantitative easing (QE) sterling is likely to remain unloved."