The Bank of England (BoE) has hinted that it will cut the base rate in the coming months.
 
In its quarterly inflation report, the BoE said that it expected the economy to slow in 2008 and inflation would accelerate.
 
However, it was confident, it said, that a cut in interest rates of half a per cent would enable inflation to meet government targets of two per cent.
 
Mervyn King, the bank's governor, said: "It's very striking that despite developments we've seen in the last three months, equity prices are on average higher now than they were in August."
 
However, the BoE also warned that inflation could spike again in the short term with the effects of higher energy prices. 
 
Mr King said stagflation, a term describing a period of slow economic growth and high unemployment, is "not a word I intend to use" but agreed that the current economic situation was difficult to predict.

The prospect of lower interest rates means that variable and discounted mortgage deals are likely to enjoy a resurgence in popularity.