Bank of England: Inflation likely to fall below 1%

BoE cuts UK growth forecast
BoE cuts UK growth forecast   

The Bank of England (BoE) warned that U.K. price growth is likely to fall below 1 percent over the next six months on Wednesday, amid "significant risks" to its inflation projections.

In its latest assessment on the country's economy, the central bank said: "Inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1 percent at some point over the next six months."

Price growth is then expected to rise gradually, returning to "around 2 percent" in three years' time.

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It came after official data revealed that the U.K. unemployment rate remained stuck at 6 percent, although wage hikes beat forecasts in the three months to September.

Hawk or dove? 'I'm a pragmatist', says BoE's Carney
Hawk or dove? 'I'm a pragmatist', says BoE's Carney   

Commodity price risk

The BoE said global commodity prices posed risks to both sides of this inflation projection, however. If more supply or weaker demand proved persistent, prices could fall, it said in its report, whereas adverse geopolitical developments or tighter supply could push prices higher.

Interest rates in the country are now not expected to rise from historic lows until late 2015, and BoE Governor Mark Carney stressed that he "know(s) how to raise interest rates" and would "when appropriate".

"It's appropriate that while tightening in monetary policy remains in prospect, markets now expect somewhat easier monetary conditions over the forecast period than was the case three months ago," he said in a press conference following the Inflation Report.

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The Bank of England's gross domestic product forecasts were little changed. It now expects growth of 3.5 percent this year, 2.9 percent in 2015 (down from earlier forecasts of 3 percent) and 2.6 percent in 2016 and 2017.

"The main downside risk stems from weaker euro-area activity, which would weigh on U.K. exports and could be associated with a further rise in financial market volatility," the BoE said in its report.

"But there are also risks to the upside—for example, greater momentum in U.S. growth or larger impacts than expected from European Central Bank or Bank of Japan policy actions."

Alex Segre | Getty Images

Unemployment stuck at 6%

The jobless rate remained at 6 percent over the period, the Office for National Statistics (ONS) said, with the number of unemployed people falling by 115,000. Analysts polled by Reuters had expected the headline rate to fall to 5.9 percent.

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On a more positive note, wage rises beat expectations. Excluding bonuses, total average weekly earnings increased by 1.3 percent - up from 0.9 percent in the three months to August. This is above inflation, which fell to 1.2 percent in September.

Low pay growth has become a stumbling block for the U.K. economy, having lagged behind the pace of recovery since the economic crisis. Carney has ruled out a rise in interest rates until there is improved wage growth and productivity in the country.

On Wednesday, the central bank head welcomed the "first tentative signs of the long-awaited pickup in wage growth".

"Real incomes will be further supported by lower energy, food and other import prices. Oil prices are now 20 percent lower than a year ago and food," he said in the press conference.

The Bank of England now expects annual real pay growth to pick up from close to 0 percent now to around 2 percent by the end of 2015.

- By CNBC's Katrina Bishop