The Bank of England has indicated that interest rates do not need to rise significantly further in order to get inflation back inline with its 2% target.
In its inflation report for November, the BoE predicted that although inflation is likely to continue to rise before the end of the year, the first half of 2007 will see in fall back into target because of the recent decrease in oil prices.
It is largely predicted that the BoE will make another 25 basis point rise to interest rates in February next year, following the rise to 5% in November.
However, the report suggests that inflation could be pushed down to 2% if interest rates were at 5.1% in early 2007 or 5.2% later in the year.
Mervyn King, governor of the BoE, says the report paints a picture of “inflation rising further above target in the near term before falling back to target over the forecast period”.
However, he warns that its Monetary Policy Committee would be ready to take action if inflation showed signs of volatility.