British inflation slowed much more than expected in January to raise hopes the Bank of England's battle with rising prices is over.
The Office for National Statistics said today that consumer prices fell 0.8 per cent last month, taking the annual rise to 2.7 per cent from 3.0 per cent in December.
But economists say the bank's new forecasts tomorrow will give a better indication of where interest rates are heading, given worries over wages and consumer demand.
Financial markets had been pricing in the risk of two more rate rises this year before the data, but investors now only see one rise following last month's surprise rise to 5.25 per cent.
Inflation has been above its 2 per cent target since May 2006, and Bank of England Mervyn King last month narrowly escaped having to explain to Chancellor of the Exchequer Gordon Brown why it had deviated far from that target.
If CPI moves more than 1 percentage point from target, an explanatory letter to the government is required.
There are growing signs the housing market is starting to cool after Europe's second-largest listed property manager, British Land, warned higher interest rates would help tame price growth.
The central bank already expects inflation to fall, perhaps sharply, later in the year but has been worried higher living costs will drive up wage demands.