British inflation is set to meet the Bank of England's 2.0 percent target in two years, the central bank predicted on Wednesday, signalling it is in no hurry to change interest rates in the coming months.
The BoE's quarterly Inflation Report, however, did little to settle the debate about whether the next move in borrowing costs will be up or down.
Governor Mervyn King, speaking at a news conference after the report was published, said the Monetary Policy Committee was keeping an open mind.
"We take this to mean that the BoE has no strong conviction about the economic outlook and is waiting for the data to make a strong case either way," said Ian Stewart, economist at Merrill Lynch.
Interest rate futures, which had started to price in a rate rise in recent weeks, rose sharply as dealers reckoned that no such move was imminent. The pound hit a 2-year low against the dollar.
Economists, who have been holding out for a repeat of August's quarter-point rate cut early next year, said weak growth could still prompt the BoE to ease rates from their current 4.5 percent.
"This is a sort of holding inflation report," said Philip Shaw, chief economist at Investec.
While the Bank's central view was that the risks to that forecast were balanced, some MPC members thought they might be weighted slightly to the downside.
The MPC was split 5-4 on its decision to cut interest rates to 4.5 percent in August with members like King wanting no change because they were more worried about inflation rising.
The inflation report said that CPI was likely to remain above its target in the near-term before dipping below as the effect of higher energy prices wanes.
The Office for National Statistics said on Wednesday claimant count unemployment rose 12,100 in October, the ninth consecutive increase and the biggest rise since May.
This was well above the modest rise of 5,000 that economists had expected and followed an increase of 10,700 in September, leaving the jobless rate at 2.8 percent.
Separately the ONS said that average annual earnings growth eased to 4.1 percent in the three months to September from 4.2 percent, confounding expectations for no change. Underlying pay growth excluding bonuses held steady at 4.0 percent.
The figures suggest a weakening job market while higher inflation in recent months is not feeding into wage growth, and underpinned expectations that the Bank of England has room to trim interest rates further from 4.5 percent.