Two more interest rate cuts likely

The BoE said that inflation was expected to be around three per cent by mid-year and that GDP growth would fall to below two per cent by the end of the year. They also made clear their resolve to keep prices in check.

"We are determined to bring inflation back to target," Bank of England Governor Mervyn King told a press conference.

Policymakers are mandated to target consumer price inflation at two per cent and are juggling a slowing economy with rising price pressures, although recent data showed the UK economy grew slightly faster than expected at the end of last year.

Oil prices are not far below the $100 a barrel mark while the cost of food and energy has continued to skyrocket.

Domestic energy suppliers such as British Gas owner Centrica and EDF Energy have recently announced double-digit price rises.

There are worrying signs from the housing market, with house prices falling at their fastest pace in at least a decade during the three months to January according to a report from the Royal Institution of Chartered Surveyors.

But the labour market is holding up. Average earnings in the three months to December rose less than expected while the number of people claiming jobless benefit fell more than expected, and for the 16th straight month in January.