The Bank of England has warned that the recent turbulence on the world's stock markets could damage the UK's economic recovery.

[The Bank] remains ready to take whatever action in either direction to meet the inflation target

Mervyn King, Bank of England deputy governor

The Bank's forecast of growth and inflation in the UK have been revised lower in its latest quarterly inflation report.

The Bank now predicts that UK inflation is set to remain below its target of 2.5% for most of the next two years.

The forecast seems likely to rule out any early chances of a rise in interest rates.

UK interest rates have remained at a 38-year low of 4% since last November.

Lower forecasts

The Bank said that despite some signs of recovery in the global economy, "sharp falls in global equity prices may dampen the recovery at home and abroad".

As a result, the it trimmed its UK growth forecast compared with its last inflation report in May.

The Bank said that growth in consumer spending was set to slow because of "slowing growth in disposable incomes and the recent sharp falls in equity wealth".

It noted the "rapid rise" in house prices but said there were "tentative indications that the pace may soon start to slacken".

Inflation 'flat'

The inflation forecast has also been adjusted downwards.

Underlying inflation is now expected to stay below the medium-term target of 2.5% for the next two years before edging higher.

But the Bank said the long-term forecast was "markedly flatter" than before.

While the inflation target is 2.5%, the Bank is allowed to over or undershoot this figure by one percentage point.

Inflation is currently at 1.5%, raising the prospect of a possible rate cut.

Deputy governor Mervyn King said the Bank was monitoring the situation closely.

"It remains ready to take whatever action in either direction to meet the inflation target," he said.