THE Bank of England yesterday defended itself against accusation's that it was "congenitally pessimistic" about inflation and therefore in favour of higher interest rates than needed.

Its governor, Mr Eddie George, acknowledged that since the bank had started publishing quarterly inflation forecasts in the wake of Britain's exit from the European exchange rate mechanism in September 1992, it had been "fairly consistently over pessimistic" about inflation prospects, though significantly less so than the majority of other forecasters.

But he said inflation forecasting was not a precise mechanical process - a difficult idea to get over to the general public, who tended to see forecasts as either right of wrong.

Looking ahead 18 months to two years, as the bank's forecasts were required to do, was an inherently uncertain process, he told the Stockholm School of Economics in Sweden.

Delivering the annual central bank lecture, Mr George said the impression that the bank had a deflationary bias was perhaps encouraged by the existence of the government's inflation target, designed to keep the underlying rate, excluding mortgage interest payments, below 2.5 per cent.