The Bank of England signaled yesterday that the scope for further interest rate cuts is limited, despite slow growth, after it forecast higher inflation.

The bank predicted that Britain's growth would slow sharply to less than 2 percent by the end of 2008 from about 3 percent at present.

The bank said it expected inflation to remain above the government's target of 2 percent, and forecast it could rise as high as 3 percent.

Publishing the report on inflation at a press conference here, Britain's central bank Governor Mervyn King said the bank faced a "difficult balancing act" and it was "the outlook for inflation, in the medium term" that the central bank's Monetary Policy Committee (MPC) would remain focused on.

King said it was likely that the rate of inflation would hit 3 percent by the middle of this year, which would require him to write a letter of explanation to the government.

However, he anticipated that the rise in inflation would be temporary and would be due to increases in imported energy and food prices that were unlikely to recur.

"The central view in this forecast is, looking several years ahead, there's no reason to expect house prices to be markedly above where they are now," King said.

However, he said while the picture painted by those working in financial and housing markets was bleak, the mood outside London and in other areas of the economy was not as bad.

January's Consumer Prices Index (CPI) inflation figure rose to 2.2 percent, up from 2.1 percent in December and the highest rate since June.

The increase was due to rising fuel and food prices, and it kept the CPI figure above the government-set target of 2 percent.

The bank cut Britain's interest rates last week to 5.25 percent from 5.5 percent in an attempt to prevent a major slowdown in the economy.

Many economists have expected interest rates to fall as low as 4.5 percent by the end of 2008 from the present 5.25 percent.