While he reiterated his belief that temporary factors were driving up the cost of living, including high food and energy costs and the increase in VAT to 20pc, he said the Monetary Policy Committee believed inflation will be around target, at 2pc in two or three years, under the assumption that the bank rate increases in line with market expectations.
That could mean up to three rate rises before the end of the year.
The Governors letter seems to endorse market pricing for the Monetary Policy Committee to hike soon, said Citi economist Michael Saunders.
Interest rates have been held at a record low 0.5pc for almost two years but money markets are pricing in rates at 1.25pc by the end of this year, and in general expect a faster pace of tightening over the next two years than they did in November.
The Bank produces two forecasts for inflation in its quarterly report - one based on market interest rate expectations and one that assumes interest rates remain at 0.5pc.
Analysts reckon that near-term inflation forecasts on both measures will be revised upwards to reflect a greater knock-on impact of rising commodity prices and value-added tax.
The November forecasts envisaged inflation falling to a modal 1.45pc in the fourth quarter of 2012 based on market rate expectations, and 1.59pc based on unchanged policy.
For the first time in a while, assessing what happens to monetary policy will depend on both fan charts, said Alan Clarke, economist at BNP Paribas.
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2016-02-26
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