The Bank of England's govenor is confident of UK growth prospects

In its latest inflation report, the Bank said Britain's consumer price index (CPI) would remain above target in the mid-term before falling back.

Inflation fell last month to 2.3% for the first time since September 2004.

The Bank also dampened expectations of a cut in interest rates by maintaining its forecast for a pick-up in growth in the UK economy next year.

Better picture

Bank of England governor Mervyn King said he expected gross domestic product (GDP) growth to increase in 2006, "reflecting a recovery of domestic demand and foreign trade".

However, he said that risks to the Bank's forecast were balanced.

Many analysts believe the Bank's Monetary Policy Committee (MPC) will eventually be forced to cut interest rates from the current level of 4.5%, citing weaker consumer demand and poor High Street sales.

Separate figures on Wednesday showing a dip in UK average earnings growth added to speculation that base rates would be trimmed early next year.

However, Mr King said: "Business surveys and the continued growth of employment, apparent again in this morning's figures, paint a less subdued picture."

'Too optimistic'

Mr King said CPI inflation would "fall back to below the 2% target over the next year before gradually rising back to and then a little above the target two years and more ahead".

He added that there were "signs of a strengthening of activity in the housing market, with house prices remaining broadly stable".

But some analysts described the latest Bank of England inflation report - and Mr King's comments - as too optimistic.

"It looks like Mervyn King is getting it wrong on UK growth, inflation and interest rate policy," said David Brown, chief European economist at Bear Stearns International.

"The only real debate for UK rates now is timing and whether the MPC will pre-empt market expectations for a February cut with an earlier move."

Investec chief economist Philip Shaw added: "Although it is clear the Bank is planning to keep rates on hold for now, our view is the MPC is still too optimistic on growth."