The risks of inflation have eased back slightly over the past three months.

In its latest quarterly inflation report, the Bank of England said the outlook for prices was "little softer" than it had been at the time of its last report in August.

The Bank also warned that there was greater uncertainty this time around over its forecasts, as they waited to see the impact of rising oil prices on the global economy.

Nevertheless, the report, which shows underlying inflation below the Government's 2.5 per cent target throughout next year before rising to around target in 2002, is likely to raise hopes that interest rates may now have peaked. The report shows that divisions still remain on the Bank's key Monetary Policy Committee - which sets interest rates - over the inflation forecast, with differences of up to 0.25 per cent either way.

"Doubts about the speed of the slowdown in the world economy, the evolution of oil prices, the pace of deceleration in private sector demand and the likelihood of continued benign outcomes in the labour market have made the committee more uncertain about prospects than in August," it says.

Overall, the report said the outlook was for steady economic growth over the next two years, with inflation close to the target rate.

The report warned if there were further "sustained" increases in the price of oil, it would heighten the risks of a global economic downturn.

It also suggested that, with pay pressures subdued despite falling unemployment, the economy may be able to sustain a lower level of unemployment without triggering inflation.

However, it admitted that the evidence was not yet conclusive and that the Monetary Policy Committee would need to keep a close eye on developments.