Bank of England expected to raise inflation forecasts

By Nigel Davies

LONDON (Reuters) - The Bank of England will raise its inflation predictions and become more pessimistic about growth when it presents its new quarterly forecasts next Wednesday, according to economists polled by Reuters.

The Bank faces a difficult test as inflation is likely to soar to twice its target rate of 2.0 percent in the near-term at the same time that economic data is flagging the risk that the economy will stagnate and perhaps even tip into recession.

Twenty-five economists polled by Reuters before the Bank releases its August Inflation Report on Wednesday unanimously predicted the central bank would upgrade its inflation outlook and downgrade forecasts for economic activity.

They expect the Bank to say the balance of risks are on the upside for inflation, and on the downside for growth.

That is likely to prompt the Bank to leave rates on hold at 5.0 percent for now but most analysts are convinced that a sharp slowdown in growth will become the central bank's focus heading into 2009 and will force it into a series of rate cuts.

A rate cut any sooner would be tricky given the International Monetary Fund and some financial market economists have forecast that inflation could rise as far as 5.0 percent by the end of the year.

"The Bank will say that downside risks to growth have materialised, but the Report will not tip the balance either way as the outlook for inflation is very uncertain," said Kenneth Broux, economist at Lloyds TSB.

He said the Bank would be happy to leave rates at 5.0 percent for now since inflation would likely subside as economic growth slowed.