The Bank of England believes growth will be stronger and inflation will be weaker than expected for the first time since before the financial crisis.
Speaking today to launch the Bank's latest Inflation Report, governor Mervyn King said the news was a welcome change.
He said: "Of most significance today is that there is a welcome change in the economic outlook. Today's projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago.
"That is the first time I have been able to say that since before the financial crisis."
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CPI inflation is 2.8 per cent in March and Mr King admitted it had stayed above its two per cent target for most of the past five years. This was due to domestic energy bills, university tuition fees and import prices.
Mr King said that if these price pressures were not contained than the challenge of bringing inflation below two per cent would be even more difficult.
Attempting to return inflation too quickly could result in slower growth and higher unemployment. On the other hand, allowing it to remain high could put price stability at risk.
Interest rates are expected to remain below one per cent for the next four years. The base rate has remained at 0.5 per cent for over four years since it was changed in March 2009.

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