The Bank of England suggested that there won't be an
interest rate hike this year, pushing expectations of a rise back to
2016, as inflation is expected to fall below zero in coming months.
"Market interest rates imply that Bank Rate is expected to increase from mid-2016 to a little over 1 percent in three years' time, materially lower than had been implied three months ago," according to the central bank's Inflation Report, published Thursday.
Read MoreBank of England holds fire as inflation weighs
In an open letter to the Chancellor of the Exchequer, also published Thursday, Bank of England Governor Mark Carney said the current period of falling prices was "temporary" and a "fundamentally distinct phenomenon from deflation."
Data published last month revealed that the rate of inflation in
the U.K. fell to 0.5 percent in December year-on-year -- its lowest level in 14 years.
Sharp falls in food and energy prices, which Carney said were generally good things for U.K. households, were largely to blame for weak inflation.
"Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households' real take home pay, particularly if wages are growing. This is clearly the case in the U.K. at the moment," he said in the letter.
"Market interest rates imply that Bank Rate is expected to increase from mid-2016 to a little over 1 percent in three years' time, materially lower than had been implied three months ago," according to the central bank's Inflation Report, published Thursday.
Read MoreBank of England holds fire as inflation weighs
In an open letter to the Chancellor of the Exchequer, also published Thursday, Bank of England Governor Mark Carney said the current period of falling prices was "temporary" and a "fundamentally distinct phenomenon from deflation."
Data published last month revealed that the rate of inflation in
the U.K. fell to 0.5 percent in December year-on-year -- its lowest level in 14 years.
Sharp falls in food and energy prices, which Carney said were generally good things for U.K. households, were largely to blame for weak inflation.
"Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households' real take home pay, particularly if wages are growing. This is clearly the case in the U.K. at the moment," he said in the letter.
In a press conference Thursday, the central bank head added that this weakness masked "stronger underlying dynamics" in Britain.
Carney said he expected inflation to hit the Bank's 2 percent target within two years' time, sooner than earlier forecasts.
Read MoreCentral London apartments up 33% last year
However he also stressed that Monetary Policy Committee was ready to take action when needed -- and would even cut the Bank of England's main interest even further below it record low level of 0.5 percent if growth and inflation prospects deteriorated.
Sterling rose towards a seven-year high against the euro and gilt yields climbed after the Governor struck a mostly positive tone in the report.
Sterling hit the day's high of $1.5340 and firmed to 73.91 pence against the euro, up around 0.7 percent on the day.
Carney said he expected inflation to hit the Bank's 2 percent target within two years' time, sooner than earlier forecasts.
Read MoreCentral London apartments up 33% last year
However he also stressed that Monetary Policy Committee was ready to take action when needed -- and would even cut the Bank of England's main interest even further below it record low level of 0.5 percent if growth and inflation prospects deteriorated.
Sterling rose towards a seven-year high against the euro and gilt yields climbed after the Governor struck a mostly positive tone in the report.
Sterling hit the day's high of $1.5340 and firmed to 73.91 pence against the euro, up around 0.7 percent on the day.
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