The Bank of England forecast inflation to remain around its target of two per cent.

The Bank projected the Consumer Price Index (CPI) to increase at a steady rate for the next two years following a dip from a recent high of 2.5 per cent in September on the back of the soaring cost of crude oil to 1.9 per cent in December and January.

And with inflation projections hovering around the two per cent mark beyond the two-year horizon into 2008, the Bank's key quarterly inflation report offered few signs that a further cut in interest rates was imminent.

The Bank's Monetary Policy Committee (MPC) sets interest rates every month with a view to keeping inflation at two per cent over a two-year period. Earlier in the week, the Office for National Statistics said the CPI had dropped to 1.9 per cent in December and January, but yesterday's MPC report forecasts a rise back to target later this year and through to early 2008.

In the report, the Bank also forecast economic growth to recover from its present weakness ''to around its historical average''.

Bank of England governor Mervyn King said: ''The picture of the UK economy painted by the latest official data is of a rather shallow slowdown followed by a return to growth of GDP close to its long-term average."