The Bank of England warned yesterday that British interest rates may not have peaked yet, as official figures showed the number of people unemployed and claiming benefit in Britain falling to a 17year low. The bank said that interest rates now looked consistent with the government's 2.5 per cent inflation target in two years. But the risks still "appear to be more on the upside", the bank said in its quarterly inflation report.

Base rates have been raised a quarter-point in each of the last four months, taking them to 7 per cent. This has reduced the bank's forecast for inflation two years ahead from nearly 3 per cent since May. "Monetary policy has now reached a position at which it should be possible to pause in order to assess the direction in which the risks are likely to materialise," the report said.

Mr Mervyn King, the bank's chief economist, added that it was too early to say in which direction rates would move next.