Mervyn King yesterday achieved the distinction of increasing his growth and inflation forecasts while at the very same time leading financial markets to judge that super-lax monetary policy can stay looser for even longer.

Market prices are now pointing to base rate staying at only 0.5 per cent until late into next year. Yet by then, according to the Bank of England’s latest fancharts, the economy will be chugging nicely into third gear, if not fourth.

All the signs are that the economy is close to a turning point. The dramatic slowing in unemployment growth is especially encouraging. Forecasts of three million unemployed are now being torn up.

The great uncertainty is fiscal policy. The Bank bases its predictions on public spending and tax plans unveiled in the spring. Whichever party is in power next year, those plans will be dumped (and the Pre-Budget Report, on December 9, may offer some first clues). Spending will have to be cut and taxes raised to get the public finances in any sort of order.

That robust tightening should, in theory, give the Bank considerable leeway to keep monetary policy looser for longer.

It is that theory, rather than the formal statements from Threadneedle Street, that is increasingly shaping expectations for interest rates.

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