UK inflation is likely to fall below 1% in the next six months, the Bank of England said today, encouraging investors to build on their bets that it will not raise interest rates until late next year.
Bank of England governor Mark Carney pointed to "troubling" developments in the euro zone, where the economy is at risk of falling back into recession.
"A spectre is now haunting Europe - the spectre of economic stagnation, with growth disappointing again and confidence falling back," he said, before adding that Britain's economy had continued to normalise.
The Bank of England said that since its last set of economic forecasts in August, markets had pushed back their expectation for the date of a first rate rise until October next year from the first three months of 2015.
"It is appropriate that, while a tightening in monetary policy remains in prospect, markets now expect somewhat easier monetary conditions over the forecast period than was the case three months ago," Carney said.
He stressed that the views of investors and "shouldn't be taken as validating any particular date for the first rate increase."
UK inflation has fallen unexpectedly fast to a five-year low of 1.2% and the Bank of England said the outlook for inflation had also weakened due to a sharp fall in commodity prices.
If it raised interest rates as markets expected, inflation was still likely to be just below its 2% target in two years' time, the central bank predicted.
Despite a weaker global outlook, the Bank of England left its forecasts for British economic growth little changed, saying that cheaper finance should offset the effect of weaker overseas demand.
It continues to expect 3.5% growth this year - which would make Britain the fastest growing big industrialised economy - followed by 2.9% in 2016, only a shade lower than it forecast in August.
"The main downside risk stems from weaker euro area activity, which would weigh on UK exports and could be associated with a further rise in financial market volatility," the bank said.
It also still expects a big rebound in wage growth next year, with wages rising by 3.25% - a rate not seen since the financial crisis - after growth of 1.25% this year.
Data out earlier today showed a bigger than expected pick-up in wage growth in the third quarter, with average weekly earnings excluding bonuses rising by 1.3%. UK inflation has generally outstripped wage growth in recent years.
UK unemployment levels held steady at 6%. After a rapid fall over the past year, the Bank of England expects more modest declines ahead, with the rate down to 5.4% by late 2015.
The bank said its lower inflation forecast largely reflected falls in the price of oil and weaker price growth for food and some other imports. But there were signs of lower domestic price pressures too.
UK house price inflation has come off the boil, and the bank almost halved its forecast for housing investment growth next year to 7.5% from 13.75% in August.