HIGHER borrowing costs appear to be on the cards after the Bank of England predicted inflation would hit its two per cent target in the next couple of years.

The forecast was contained in the bank's quarterly inflation report, which recognised that the market was expecting a quarter-point increase in interest rates to 4.75 per cent over the next 12 months.

Recent hikes in gas and energy prices were expected by the bank to drive inflation above two per cent in the short-term before falling back in line during 2008.

But the bank warned there was uncertainty about whether prices of other products will rise once pressure from energy costs eases.

Import costs are rising at their strongest rate for five years, while surveys suggest fresh recruitment drives would take place in coming months.

The bank predicted the economy would continue to recover from its low point of last year as spending picks up, investment recovers and trade provides a boost.

But its projections for growth were slightly weaker than in February.

Inflation staying at its two per cent target implies the Monetary Policy Committee is mulling over higher borrowing costs.