THE Bank of England has stopped short of signalling that UK interest rates have peaked, though its latest inflation report concluded that the outlook for inflation was better than at the time of its last report in February, and the deadlock on the monetary policy committee was resolved last month with Charles Goodhart defecting from the hawks to the doves.

To some extent, the inflation report has been quickly overtaken by events, with yesterday's average earnings figures sporting an unexpectedly large jump to 4.9% (at the height of the bonus season) and the recent retreat by the pound from its March peak of DM3.10 to around DM2.90.

In highlighting these developments, Mervyn King, the Bank's chief economist, who defected from the doves to the hawks at the monetary meeting in February, rekindled fears that rates might still have further to rise.

In truth, it would take a further deterioration in the average earnings picture and a rapid decline in sterling to force another tightening of monetary policy at a time when the economy is visibly slowing down and the manufacturing sector has moved into recession.

But the arguments on monetary policy remain finely balanced, and the worries over sterling (on the downside) and average earnings (on the upside) suggest that the Bank will be in no rush to cut rates, as some economists had forecast for the second half of this year.

Base rates have held steady at 7.25% since November, after five quarter-point increases since the General Election. It takes time for monetary tightening (and the more modest tightening of fiscal policy) to work their way through to the real economy.

The slightly more sanguine view of the inflation outlook taken by the Bank in yesterday's quarterly report owed most to a downward revision of its activity forecasts, a clear sign that higher interest rates are having the desired effect.

Even stronger sterling (until recent times) and a perception (now apparently misconceived) that average earnings growth was weaker than the tightness of the labour market might have suggested also inclined the Bank to moderate its view.

The Bank regards anything above 4.5% growth in average earnings as being inconsistent with the Government's 2.5% inflation target.

So it was no surprise that King said yesterday that the 4.9% recorded in February would have to fall back if the target was to be achieved.

The problem is aggravated by the growing discrepancy between private and public sector earnings growth - 5.6% to 2.6%. But earnings figures are historic, and in the opening months of the year they are distorted by private sector bonus payments, which were particularly high and widely spread this year.

Unless sterling catches cold, interest rates should have peaked, but the first reduction may not occur until next year.