The Bank of England has said that the UK's economic growth is set to pick up, although risks to the recovery remain.
In its latest Inflation Report, it said economic conditions remained uncertain and the recovery could be hit by "substantial fiscal tightening".
But Bank governor Mervyn King endorsed the new government's deficit reduction plan, calling it "strong and powerful".
Mr King said it was "sensible" to take measures this year to demonstrate a commitment to cutting the deficit.
In its Inflation Report, the Bank predicted that inflation - which stood at 3.4% in March - would remain above the 2% target for the rest of the year.
However, it is then expected to fall below 2% for the following two years.
Analysts said the Bank's forecast suggested that UK interest rates - currently at a record low of 0.5% - were set to remain low for some time.
"There are still no indications that the [Monetary Policy] Committee is anywhere close to tightening policy," said Vicky Redwood at Capital Economics.