The Bank of England’s quarterly bulletin suggested that rates could safely be held at 0.5% in order to prevent growth from stalling.
It said that while utility food and fuel costs are soaring, there is little evidence that short-term price rises are feeding through to wages or long-term price setting by big companies.
It eases fears that consumer price inflation will continue to run at more than twice the Treasury’s 2% target.
In the face of concern that Britain is heading for a period of “stagflation”, when prices rise as the economy stagnates, the Bank said that “long-term inflation expectations remain reasonably well anchored to the target”.
Sir Mervyn King, knighted in the Queen’s 2011 Birthday Honours, has repeatedly promised to keep rates low to allow public spending to be cut without destroying the recovery.
Individual and corporate spending are seen as key to keeping the economy expanding at a time when the cuts, taking £80bn out of the public sector over the next four years, are just taking hold.
Figures released by the National Institute for Social and Economic Research suggest that the economy grew 0.4% in the three months to the end of May.
The Bank said in its report: “Even with short-term inflation expectations remaining elevated, there is little evidence as yet that they are becoming entrenched in wage and price-setting behaviour.”
This is because the firms, individuals and markets that the Bank examined all seemed sure that inflation will start to return to the 2% target level from the current 4.5% by early in 2012.
Despite the consumer prices index frequently being 1% above the 2% target, the market cost of borrowing for British mortgage lenders, banks and corporations have actually been falling. This is in sharp contrast to what has been happening in troubled Euro-zone countries.
The Bank said it found little evidence that recent rises in the CPI have any impact on wage settlements. It reports that “current wage growth remains around 2%, some way below its pre-recession average rate”.
