Bank of England governor Mark Carney says the British economy has begun heading back to normal but interest rates may remain low "for some time."

The U.K. central bank released a report on the economy that shows an improved outlook for unemployment and inflation and remaining optimism on GDP growth, compared to earlier this year.

The bank believes the British economy will grow 3.4 per cent this year and has upgraded its forecast for next year to 2.9 per cent.

'Amidst the excitement that output is close to regaining its pre-crisis level we should not  forget that the economy has only just begun to head back towards normal' - Bank of England governor Mark Carney

The unemployment rate is at its lowest level in five years – 6.8 per cent – but Carney, a former governor of the Bank of Canada, noted there is still “slack” in the labour market, including 1.4 million people working part-time.

"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," Carney said.

The British economy is still smaller than it was in 2008 following a deep recession brought on by the global financial crisis and that means the central bank must move slowly on raising rates.

Bank rate unchanged 5 years

"As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which bank rate will need gradually to rise," Carney said. "The exact timing will inevitably be the subject of considerable speculation and interest."

The British pound fell in trading today on his predictions that it will be some time before conditions are right for an interest rate hike.

The bank's benchmark interest rate has been at a record low level of 0.5 per cent for more than five years.

Even when the time comes for a rate hike, it is likely to be a modest one, Carney said, echoing the approach taken by Fed chair Janet Yellen.

Carney says he is hoping to see movement from a recovery supported by household spending to an expansion sustained by business investment and from falling to rising real wages. He predicts inflation will stay below the bank’s target rate of two per cent for another two years.

“Amidst the excitement that output is close to regaining its pre-crisis level we should not  forget that the economy has only just begun to head back towards normal,” he said in his analysis. 

With files from the Associated Press