The Office for Budgetary Responsibility cut its growth forecast for 2011 from 2.1% to 1.7% due to higher inflation and the surprise contraction in the economy at the end of last year.

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Moreover, the MPC still has room for manoeuvre to counter the contractionary effects of additional budgetary curbs, because its central forecast shows consumer-price inflation below the 2% target in two years' time, the horizon it focuses on when setting monetary policy.

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"This, and the fact that UK oil revenue is forecast to decline in any case, would make the budgetary impact marginal, " says the note.

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