Only one further increase in interest rates should be enough for the Bank of England to bring inflation back to its 2 per cent target, despite mounting fears that it could take more aggressive action, Britain’s leading economics institute says today.

Since a jump in inflation in March above 3 per cent forced Mervyn King, the Bank’s Governor, to write an explanatory letter to the Chancellor, speculation has grown that base rates could rise at least twice more by the summer.

There have also been suggestions that the Bank’s Monetary Policy Committee (MPC) could impose a half-point rate rise next month.

However, in its latest quarterly assessment this morning, the influential National Institute of Economic and Social Research (NIESR) concludes that one more quarter-point increase, widely expected next week, would be enough to get inflation back in check and fulfil the MPC’s remit. That would take interest rates to 5.5 per cent.

NIESR’s central forecast is that consumer price inflation will fall back to the MPC’s 2 per cent goal by the second quarter of next year. Although inflation is projected then to pick up fractionally again, it would be exactly at its target in 2010.

Ray Barrell, NIESR’s senior fellow, said that unless there were signs that households’ expectations of future inflation were accelerating, putting the target at risk, which was not the case at present, then: “A quarter-point more is enough. Inflation around 2 per cent will do.”

The institute’s own expectation is for the MPC to raise rates once more by a quarter-point before the cost of borrowing peaks this spring. NIESR said that strong economic growth last year, of 2.8 per cent, meant that there was no slack left in the economy to provide headroom for growth above the long-term trend without this sparking inflation. There was “some evidence” of companies gaining greater ability to push up prices, while the rise in headline inflation above 3 per cent last month was broad-based and therefore “a signal about underlying inflationary pressures”.

Yet the institute noted that there were few signs of pay growth gathering pace in a way that would stoke price pressures, and there was “little evidence that the anchor on inflation expectations has drifted much in the past six months”.

NIESR predicted that growth would remain strong, at about 2.7 per cent this year, before slowing to 2.6 per cent in 2008 and 2.4 per cent in 2009.

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