Bank of England governor Mark Carney says inflation could turn negative in the Spring and warns he would consider cutting interest rates if deflation persists.
The Bank’s latest inflation report, published today, suggests there is an increasing likelihood of inflation turning negative before levelling off later in the year.
Carney says inflation expectations are sliding in the face of falling oil and food prices, although he considers this to be positive for the UK rather than a deflationary trend.
“We would distinguish between what is happening at present and what is likely to happen over the course of what is seen to be a bad deflation outcome,” he says.
However, Carney adds the Bank will consider a range of options in returning inflation to the 2 per cent target as soon as possible, including further quantitative easing and rate cuts.
“The MPC stands ready to take whatever action is needed, as events unfold, to ensure inflation remains likely to return to target in a timely fashion”, Carney says.
However, he maintains that “limited” Bank rate increases over the next two years remain probable. “It’s pretty clear in terms of our central expectation that the most likely next move in monetary policy is an increase in interest rates,” he says.
Hargreaves Lansdown senior economist Ben Brettell says: “The sharp dip in inflation reflects the nature of year-on-year figures; as prices are compared with one year ago, one-off factors like the oil price slide can have a large impact.
“However, as they drop out of the figures the rebound effect can also be exaggerated. In 12 months’ time, the inflation numbers will compare fuel prices with today’s low base.”