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Mark Carney, governor: "The UK economy continues to perform strongly"
The Bank of England has upgraded its growth forecasts for next year, saying the economy "has started to head back towards normal".
Its latest inflation report predicts growth of 2.9% next year, up from its 2.7% forecast three months ago.
However, it has left its forecast for this year unchanged at 3.4%.
Governor Mark Carney said the economy had "edged closer" to the point when interest rates would need to rise, but indicated this remained some way off.
He reiterated that any increases would be "gradual" and that the rate "may stay at historically low levels for some time".
End QuoteThe Bank of England's assessment of the health of the UK economy has not changed in any fundamental way over the past three months"
The comments hit the value of the pound, as some analysts had thought the Bank might start to raise rates before the end of the year.
"Securing the recovery is like making it through the qualifying rounds of the World Cup - it's a real achievement, but not the end goal. The prize in the economy is sustained and prolonged growth," Mr Carney added.
The Bank has also sharply upgraded its forecasts on unemployment. It now predicts the unemployment rate will fall to 5.9% in two years, compared with its prediction last year that the rate would remain above 7% for some years.
The forecast upgrade followed the latest official jobs data showing the unemployment rate was 6.8% in the three months to March.
Spare capacityThe Bank also said there was still a significant amount of "slack" in the economy, meaning that it was not growing to its full potential because of underinvestment.
Continue reading the main storyIt noted that both employment levels and average hours worked were still both below pre-crisis levels.
In February, the Bank estimated that the spare capacity was equivalent to 1% to 1.5% of gross domestic product (GDP).
The Bank said there had been a "modest fall" since then, but did not give an exact figure.
"The path of slack is uncertain, and there is a range of views on the [Monetary Policy] Committee. For a given growth profile, it will depend heavily on the timing and strength of the rebound in productivity growth," the Bank said in its report.
The Bank said it also expected inflation to remain below its 2% target in two years' time.
Capital Economics economist Samuel Tombs said he expected the inflation report to "go some way to cool expectations that the Monetary Policy Committee will raise interest rates as soon as the first quarter of next year".
"We continue to think that interest rates will remain on hold until the second half of next year, later than the markets and most economists expect," he added.
The pound has been rising recently against other currencies on expectations that the Bank might have to raise interest rates sooner rather than later, so the latest comments pushed the value of sterling lower.
The pound was down 0.3% on the day against the dollar at $1.6774 and dropped 0.35% against the euro to 1.2236 euros.
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