May 14 (Bloomberg) -- The Bank of England said inflation will accelerate, breaching the government's 3 percent limit for ``several quarters,'' and making it harder for policy makers to stave off a possible recession with interest-rate cuts.

The bank, which has a mandate to keep inflation at 2 percent, said gains in consumer prices will exceed that target in two years if it reduces the benchmark rate to 4.5 percent in 2009, as investors predict. The Bank of England this month left the rate at 5 percent.

``The Monetary Policy Committee is facing its most difficult challenge yet,'' Governor Mervyn King told reporters in London after the bank published its quarterly forecasts. ``We are traveling along a bumpy road as the economy rebalances. Monetary policy shouldn't try to prevent that adjustment.'' It ``must focus on bringing inflation back to the target in the medium term.''

Investors reduced bets on rate cuts after King's comments, which came as evidence mounts that the housing-market slump is dragging down economic growth. The U.K.'s inflation rate jumped the most since 2002 in April, climbing to 3 percent, and any deterioration will require King to write a letter to the government explaining how he plans to get prices under control.

The rate on the December interest-rate futures contract rose about 12 basis points to 5.67 percent after the report. The Bank of England has cut its benchmark rate three times since December. At 5 percent, it's still the highest in the Group of Seven nations.

Letter Rule

British law requires King to write a letter of explanation to the Chancellor of the Exchequer Alistair Darling if inflation strays more than 1 percentage point from the 2 percent target. The governor has only written one letter since the Bank of England gained rate-setting independence in 1997, after inflation reached 3.1 percent in March last year.

``If the governor is having to write repeated letters to the chancellor it is unlikely we will see further rate cuts,'' Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said in an interview on Bloomberg Television. ``We may get more interest-rate cuts in 2009 than we thought before, but for now there is very little prospect of a cut.''

The Bank of England has reduced rates partly to cushion the economy from the global jump in credit costs. King said it's ``quite possible we will get an odd quarter or two of negative growth'' and the U.K. property market had the most widespread price declines since at least 1978 last month.

Voter Displeasure

Faster inflation, slower growth and the government's response to the credit crisis have eroded the popularity of Prime Minister Gordon Brown since he took over from Tony Blair in June.

During his decade as finance minister, Brown presided over a housing boom that encouraged consumers to rack up record debt and designed a regulatory system that failed to prevent last year's run on Northern Rock Plc.

With property values falling and households now struggling to cope with higher energy and food prices, Brown's ruling Labour Party suffered its worst local-election performance in four decades on May 1. Darling said today he's concerned that climbing food and fuel costs will hurt middle-income families.

U.K.'s 3 percent inflation rate is still lower than price measures in other countries. Euro-region inflation accelerated to 3.6 percent in March, the most in 16 years.

The U.S. consumer price index rose 4 percent for the 12-month period ending March. In China, inflation accelerated to 8.5 percent in April, the most since 1996.

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.

Last Updated: May 14, 2008 07:47 EDT