The Bank of England on Wednesday upped its projection for British inflation over the next two years warning that inactive consumer spending remained the main risk to economic growth.

The Bank’s quarterly inflation report presented a mixed picture for interest rates in the coming year. Sterling fell after the inflation forecast was released because investors had expected a steeper rise and more hawkish comments, while interest rate futures also showed that investors thought a rate rise this year was now less likely, said Economics Reporter.

John Butler at HSBC said in an interview: “Overall the report is much less dovish than in November but neither is it hawkish. It reflects a balanced view, unclear whether the next moves in rates are up or down. The rally in the bond market seems to be one of relief, as the fear of an outright hawkish report were not realized.”

In his opinion, the main difference between the November and February inflation reports was that the latter was more balanced in its assessment of the Bank’s chances of hitting its 2% inflation target in two years’ time.

Mervyn King, the Bank’s governor, said on Wednesday that the forecast of the monetary policy committee for GDP growth had not undergone any changes. Though consumer spending has slowed in the fourth quarter, it is still early to draw conclusions.

He said: “As I said last month in Manchester, drawing strong conclusions about spending over the Christmas period is something we should all give up for Lent.” It would take time to assess where consumer spending was heading.

According to the Economics Reporter, labour market statistics on Thursday showed a further fall in unemployment as well an increase in the underlying rate of annual pay growth (excluding bonuses) to 4.5%, its fastest pace in nearly three years.