LONDON, Nov 16: Britain’s borrowers were reassured on Thursday by the Bank of England that after all there would perhaps be no more increase in the interest rate from 5 per cent fixed earlier this month as it has sharply downgraded its inflation forecast to around 2pc in its November inflation report.

The bank’s quarterly inflation report which has been put on its website indicates that a 23pc fall in oil prices had abruptly changed the economic outlook since the doom and gloom scenario put out by its August report.

The Bank said CPI inflation was likely to edge up from 2.4pc in the near term and peak at 2.7pc before "settling back around the 2pc target" in mid-2007, some six months earlier than expected.

Bank of England Governor Mervyn King said that while there is "significant uncertainty" about the outlook for inflation, the central view is that it will rise further before falling back to the target by the middle of next year.

Mr King said: "Inflation is likely to remain volatile over the coming months, but the main risks to the inflation outlook in the medium-term surround the behaviour of pay growth and any recovery of profit margins as energy price inflation falls.

The report said the bank was keeping a close eye on M4 money supply now surging at a 14.5pc annually, the highest rate since the bank gained its independence in 1997.

"Broad money is growing rapidly so it does pose an upside risk to the forecast," said Mr King. Excess credit is already leaking into the whole gamut of assets from stocks, to fine art and property, and may ultimately fuel inflation.

Mr King issued a clear warning that "all lenders and all borrowers should think very carefully" before they act. Some people had taken on "far more credit than it was ever plausible to repay," he said, but so far the numbers of households with serious debt problems was still under 5pc.

The report said household debt had doubled since 1999, reaching 150pc of post-tax income. Over a third of families said unsecured debts were either a "heavy burden" or "somewhat of a burden", although the arrears rate was still far below the levels of the 1992 recession.

The report came as data from the Office of National Statistics showed earnings growth slipped to 3.9pc in the third quarter, down from 4.2pc.

Unemployment nudged up a further 27,000 to 1.7m, touching a seven-year high of 5.6pc. The number working in manufacturing has fallen 77,000 this year, plumbing levels not seen since records were first kept in 1841.