The Bank of England (BoE) has upgraded its forecast for inflation in 2017 from 2.4% to 2.7%, while it is projecting slightly slower GDP growth of 1.9%.
In its latest Inflation Report, the central bank has upped is projections for CPI in 2017, after inflation jumped above its target to 2.3% in February and March.
However, it is projecting a drop to 2.6% in 2018 and to 2.2% in 2019, lower than previously predicted rates of 2.8% and 2.5%.
In the report, the Monetary Policy Committee said: "The MPC expects inflation to rise further above the target in the coming months, peaking a little below 3% in the fourth quarter.
"Through its effects on costs, the fall in sterling is likely to keep inflation above the 2% target throughout the next three years."
Although the Bank expects UK growth in 2017 to be slightly lower than previously expected at 1.9% (down from 2%), its projections for 2018 and 2019 have been raised by 0.1 percentage point to 1.7% and 1.8%, respectively.
The MPC said: "In the MPC's central projection, four-quarter GDP growth slows over 2017, as quarterly growth remains close to the Q1 rate.
"Within that, a slowing in consumption growth is largely balanced by rising net trade and investment, which provide more support to activity than in the recent past.
"Household consumption growth seems to be slowing in response to the weak real income growth associated with the lower level of sterling.
"That adjustment continues over the forecast period with growth in both income and consumption remaining below past averages."
Meanwhile, the Bank has kept interest rates unchanged at 0.25% with a vote of 7-1, with only Kristin Forbes voting for a 25 basis point rise.
The MPC is forecasting the rate to remain at this level throughout 2017 and to rise to just 0.5% by mid-2020; around 20 basis points lower than its forecast in February.
However, the committee said monetary policy may need to be tightened more than the markets expect over the next three years.
It said: "Monetary policy can respond in either direction to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.
"On the whole, the committee judges that, if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections."
Ben Brettell, senior economist at Hargreaves Lansdown commented: "Unsurprisingly interest rates were left unchanged, with just Kristin Forbes voting for a 0.25% rise to 0.5%. However, the Bank also warned that rates may have to rise sooner and faster than the market currently expects.
"Wage growth, which has been notably lacklustre of late, is seen picking up sharply next year. It might not take much positive economic data to persuade further MPC members to join Forbes and vote to hike rates, though it should be noted that she is due to leave the MPC at the end of June."
At the latest meeting, quantitative easing has been kept unchanged at £435bn, and corporate bond purchases remain at £10bn.
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