“A SPECTRE is now haunting Europe,” warned Mark Carney, governor of the Bank of England, borrowing from Karl Marx, as he unveiled the bank’s latest inflation report on November 12th. Weak growth and low confidence in Europe are chilling watchers of the world economy. Yet Britain is unspooked. The bank optimistically forecasts growth of 3.5% this year and 2.9% in 2015.

Quite apart from the upbeat forecast, the peppy overall outlook is testament to the bank’s recent success. George Osborne, Britain’s chancellor, has long hoped that monetary policy would offset the adverse effect of fiscal austerity on the economy. His wish has been granted. Low interest rates have kept mortgages cheap, stimulating consumption. Business investment is growing at 11%—its fastest rate since 2007—as firms gain confidence.

Both causes have been helped by the Funding for Lending scheme, channelling cheap loans to banks which meet lending targets (although it no longer applies to mortgages). Quantitative easing has also helped by providing a fillip to asset prices and wealth. Only exports, which have barely grown since 2011, disappoint.

There are even signs that Britain’s workers may at last be benefiting from the boom. Average weekly earnings, excluding bonuses, outstripped inflation for the first time since 2009 in the year to September. Analysis by the Resolution Foundation, a think-tank, shows that weak average wage growth has largely resulted from the changing composition of the workforce, as low-paid roles have replaced better paid jobs, rather than wage restraint. Those in work for more than a year have seen pay rises of 3.7%, according to Iain Duncan-Smith, the work and pensions secretary.

Despite the vitality of demand, inflation has tanked. Imports are cheaper, thanks to a stronger pound. Food and oil prices have been falling too. As a result, inflation has undershot the bank’s forecasts, which have been successively revised downwards (see chart). The bank now expects it will take three years for inflation to return to its 2% target.

To some extent, the bank must look through imported deflationary pressure, which is tough to control, and focus on Britain. But domestic demand also points towards loose policy: the bank estimates there is still spare capacity in the economy equivalent to 1% of GDP (although this is difficult to estimate).

Consequently, market expectations of when interest rates will rise have slipped back, from the first to the third quarter of 2015. And Mr Carney continues to emphasise that when rates do rise, they are likely to do so only gradually and to a level below their long-run average.

As long as spare capacity remains, stimulative monetary policy is necessary to raise demand. But Britain’s future challenges look structural. Stagnant productivity has held down wages and made exporters less competitive. The Bank of England is now less hopeful that monetary policy can temporarily boost productivity, reckons Andrew Benito, an economist at Goldman Sachs. Neither can the bank help assuage the emerging polarisation of the labour market as middle-income jobs disappear. It nudges aggregates, such as total spending or average wages. It would be hard-pressed to manage the distribution of economic gains too.

This puts the onus back on the government. In the long-run, supply dictates output and wages. Mr Osborne—or his successor—must rely less on monetary policy if Britain is to continue to prosper.