UBS Securities LLC says that it has changed its forecast for U.S. inflation, and now expects two more rate hikes from the US Federal Reserve Board as a result.

“Against the backdrop of hawkish Fed rhetoric and the stronger-than-expected May core CPI this week, we have changed our forecasts for the Fed and for core inflation,” it says in a new report. “We now expect the Fed to enact two more 25 basis point tightening moves of the current 5% Federal funds rate instead of only one, which we recently were anticipating for the end of June.”

Next year, though, it foresees the Fed funds rate eventually cut to 4.5%.

UBS reports that it has raised its 2006 core PCE inflation forecast (Q4/Q4 basis) by 20 basis points to 2.4%. It also raised the forecast for the core CPI to 2.8% from 2.5%. “The main reason is the unexpectedly faster rising Owners’ Equivalent Rent (OER) inflation component. We believe it partly reflects rising home rents due to incremental demand from individuals being temporarily deterred from buying a home by high prices and rising interest rates. However, we expect such OER inflation to slow next year, for which we are reducing our core PCE price inflation forecast by 20 basis points to 2.0%,” it explains.

“Despite somewhat more than earlier anticipated Fed tightening, we have not changed our viewpoint that following the end of Fed tightening this summer the benchmark 10-year Treasury bond yield will retreat to a mid-4’s range by yearend. Consequently, we also are maintaining our forecasts for real GDP growth of around 2.5% in H2(06) and 2007,” it adds.