Interest rates set to stay on hold

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In its latest quarterly inflation report, the Bank said with no rate cuts in the next two years inflation would most likely peak at just below 5% in the coming months before falling sharply next year and dipping below the official 2% target in two years' time.

Inflation hit 4.4% last month thanks to soaring food and energy prices.

But it could top 5% in the months ahead if more gas and electricity suppliers follow EDF and British Gas's recent hefty price hikes, the Bank warned.

Rising inflation, higher unemployment and a further tightening of credit conditions is likely to see the rate of annual GDP growth slow to just above zero later this year and early next year before rising again, the report predicts.

This is a marked deterioration from the Bank's last inflation report in May, which forecast growth to fall to around the 1% mark at the end of this year.

Bank of England Governor Mervyn King said: "The next year will be a difficult one with inflation high and output broadly flat.

"But with monetary policy focused on its task of bringing inflation back to the target, it will come down and we will come through the adjustment."

He added: "And we will return if not to the 'nice' decade then at least to one that, as central bankers say, is not so bad."