The UK economy is poised for a vigorous rebound that will push inflation above the government's target, the Bank of England warned yesterday.

In its latest quarterly inflation report, the bank predicted underlying inflation would fall in the short-run, but rise above the targeted annual rate of 2.5 per cent within the next two years.

Official data published yesterday, showing stronger pay growth and another fall in unemployment to a fresh 19-year low, added to fears of an interest rate increase.