LONDON (Reuters) — British interest rates will probably need to rise one more time in the next few months if inflation is to hit the Bank of England's 2 percent target in two years, the central bank signalled yesterday.In its quarterly Inflation Report published a week after it raised borrowing costs by a quarter-point to 5.5 percent, the bank said risks to the CPI rate were still on the upside and the economy would keep growing steadily.

"It does nothing to shake our view that interest rates will rise in the next few months," said Philip Shaw, chief economist at Investec.

The pound, however, fell to a two-month low immediately after the report because some investors had braced for a more hawkish report. The BoE sees CPI on target with just a minor tweak in rates. Inflation, it predicted, would be only just over two percent if borrowing costs held steady.

George Buckley, chief UK economist at Deutsche Bank, said that meant investors should be cautious in definitively predicting another hike, although the market was likely to feel comfortable about its current pricing which assumes another quarter point rise.

Certainly, BoE Governor Mervyn King took pains as usual to stress there were no pre-set decisions on interest rates — it would all depend on how the economy developed.

For now, the BoE expected inflation to fall back over the next year to below the target, thanks to lower energy bills.

The process already started in April when the CPI rate slipped back from its series high of 3.1 percent — a level which had forced King to write an unprecedented explanatory letter to the government.

King said that as ever there were huge uncertainties surrounding the central bank's main forecasts. The main downside risk was that the labour market had more slack and so pay growth would slow.

"On the upside, a number of measures of inflation expectations have drifted up, and with a limited degree of spare capacity and firm demand growth, the main risk is that businesses become more confident of their ability to raise prices and in turn pay higher wages," he said.

The economy, meanwhile, was expected to grow in line with its average rate over the last decade, expanding at a rate of around 2.8 percent in two years — the profile was little changed from February.

But the BoE shied away from making much of a call on the housing market where prices have been rising at double-digit rates despite four interest rate rises totalling a full percentage point since August.

"I think it's much too early to make the judgement," King said.

Mr. King criticised former US Federal Reserve Chairman Alan Greenspan yesterday for continuing to comment on the US economic outlook.

Asked about Greenspan's behaviour in a news conference after the release of the bank's quarterly inflation report, King said he was grateful that his own predecessor has kept silent about the economy and that he would follow that precedent when he steps down.

"I am very grateful to Eddie George for not being on the radio or in the newspapers commenting on what the Monetary Policy Committee is doing," King said.