Bank of England (BoE) chief Mark Carney said on Thursday (12 February) that British inflation could turn negative and that he expected stronger growth on the back of lower oil prices.
A halving in global oil prices and last year's strengthening of the pound have pushed down inflation to its lowest level in nearly 15 years at 0.5%, way below the Bank of England's 2% target.
The shortfall is so big that Carney sent a letter to Chancellor of the Exchequer George Osborne to explain him the discrepancy between the target and the real figure.
The BoE report said it saw little need to raise interest rates this year and could even cut them if inflation proved weaker than expected.
Releasing the Bank's quarterly Inflation Report, Carney said: "Inflation is at its lowest level since introduction of inflation targeting two decades ago. It will likely fall further, potentially turn negative in the spring and be close to zero for the remainder of the year."
The central bank also raised its growth forecasts and predicted wages would grow faster, suggesting voters may feel some of the benefit of the recent economic rebound before Britain goes to the polls in May.
"The combination of raising wages and falling energy and food prices will help household finances and boost the growth of real take-home pay this year to its fastest rate in a decade. This will support solid growth in consumer spending," Carney said.
Wages in the United Kingdom lagged behind inflation for most of the period since the financial crisis and have begun to show signs of a pick-up.
Unemployment would ''continue to fall'', Carney added.
"With sustained growth supported by robust real income growth and subdued by steady global recovery unemployment continues to fall to its pre-crisis rate of around 5 percent over the forecast," Carney said.
Asked about the possibility of Greece leaving the euro zone, Carney said: "Recognising that this is a hypothetical question, would a change in Greece's position have an impact on the forecast? Yes. Would it have the same impact on the UK economy as it would have had on 2012? No. There are differences now than there were in 2012 They include differences to the institutional arrangements in the euro, in the euro area."
Greek new leftist government is trying to renegotiate its debt agreement with a troika of lenders that include the European Union, the European Central Bank and the International Monetary Fund.
Sterling rose to a day's high against the dollar and British government bond prices fell moderately after the quarterly Inflation Report, whose overall thrust was upbeat, with the economy close to being back to running at full capacity.