Underlying inflation will peak later this year and fall below the Government's 2.5 per cent target by 1997, allowing a cut in interest rates in the autumn, according to the Centre for Economics and Business Research.
In a report published today, the think tank says a base rate cut from the current level of 6.75 per cent would help the economy shake off the effects of the mini-recession it had been going through.
The report coincides with the latest forecast from Oxford Economic Forecasting, which expects an export-led revival over the next few months, with manufacturing in the driving seat and strong performance in the capital goods sector.
The Centre for Economics and Business Research says that the conditions for renewed growth - including a recent pick-up in global economic activity and a likely revival in consumer spending funded by rising real incomes - are already in place. Interest rates would therefore have to rise again in late 1996 or in 1997 to restrain excessive growth.
Professor Doug McWilliams, the chief executive of the Centre, also argues that that the Bank of England has temporarily lost credibility because of its attempts since May to persuade the Chancellor, Kenneth Clarke, to raise interest rates. Professor McWilliams says that all the most recent statistics appeared to have vindicated Mr Clarke's position.
Separately, surveys published today show that pay awards continue to be struck at about the rate of inflation or slightly above it. The pay analyst Income Data Services reports that most private sector agreements which took effect over the summer months remained within the range of 3 to 3.9 per cent, compared with the current headline rate of inflation of 3.5 per cent.
The proportion worth 3.5 per cent has, however, more than doubled to six out of ten in the three months to the end of August.
An IDS spokesman says: "Our analysis shows that private sector pay rises have followed inflation upwards since the beginning of the year."
In the manufacturing sector, the CBI today reveals that pay deals averaged 3.4 per cent in the three months to the end of July compared with 3.5 per cent in the period to the end of June.
But service firms made awards averaging 3.7 per cent over the period from an earlier 3.6 per cent.