The Bank of England kept an inflation target of two per cent in its sights last night - providing a signal that interest rates may remain on hold.

A key BoE report on the UK economy indicated the Consumer Prices Index (CPI) will be around two per cent at the end of a two year forecast period, prompting Governor Mervyn King to comment that it was ''perfectly reasonable'' to look at this and conclude that to leave rates on hold was a ''reasonable outcome''.

Forecasts from the Bank anticipated the economy growing a little less than expected in the short term before picking up again.

Inflation, which was at 2.5 per cent last month because of soaring energy prices, is expected to fall back next year before settling near the Government's two per cent target in two years' time.

Economists were divided over the impact of the Bank's assessment, particularly as expectations for inflation were weaker than in August and so gave the Bank's more room to move the base rate - currently 4.5 per cent - if a slowdown persisted.

The BoE said there was considerable uncertainty over the rate of the recent slowdown and it highlighted the differences between official data and unofficial business surveys, adding that it continued to place some weight on the latter when making interest rate decisions.

Recent weak data has led Chancellor Gordon Brown to indicate he will have to revise his prediction for economic growth of between three per cent and 3.5 per cent this year.