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Carney warns of potential future rate cuts as deflation looms

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.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I have been watching Mark Carney for some time now and IMHO, he hasn’t put a foot wrong !

    An inspired choice for Governor !!

    Unlike Martin Wheatley who cant even tie shoe laces ! or so it seems
    I have a suggestion Martin go out and buy some slippers and spend some time in the garden !! 6 months seems the allotted amount of time !

  2. Interesting concept but don’t expect any lenders to pass on any cut in BoE. Pretty much any variable, tracker, discount rate of recent years will have had some form of floor or collar set at the current rate. Given swaps have plummeted without any change in BoE, I suspect any cut is unlikely to have a marked impact on them either….. So borrowers pay the same but deposit savers will get hit….?

  3. Rates are going up (last month) rates are going down (this month). What credibility have the BOE left? Why not just admit – THEY DON’T EFFING KNOW!. There is a broken old wooden lever in the Governors’ office – that’s the interest rate lever – its been pulled that much its come away. It should be really called THE ONLY TOOL WE HAVE LEFT. What a joke.

  4. mic2002 | 12 February 2015 12:39 pm

    I agree, there doesn’t seem to be much credibility in any of the major financial areas. This of course come down from as high up as the Chancellor who hopes to get re-elected in May. Re-elected? On the basis of what? How good we’re all doing? I don’t think so….. The BOE has so little scope to keep on top of things they’re suggesting a rate less than 0.5% may be forthcoming. An economy built on straw. We see our illustrious leaders shambling along making it up as they go. Martin Wheatley has surely been found out by now? He states; the FCA knew nothing about the HSBC scandal. Martin, see no evil, hear no evil…..or, turn a blind eye? The MAS is a crock, the new CAB, pension guidance service is launching in April and this is what they have to say; “Scripts are OK for just annuities, but this is a whole raft of new pensions options and tax treatments coming in from April; it’s becoming a complicated area.” So, where are we? They’re presently recruiting for guidance advisers but actually state; “some knowledge” on pensions issues would be “an advantage”. Yes folks, they’re going to train their own pension guidance specialist from scratch in some areas. This has turned into an industry being run by pygmies and the never have I done it experts who get promoted way above their capability whilst the rest of us plough the furrow to feed them all. All is not well in this garden.

  5. the elephant in the room 12th February 2015 at 3:18 pm

    Dear Mr Carney,

    As it is unlikely that businesses or homeowners will benefit from a further rate cut, how about the government/regulators impose caps on borrowing rates?

    For example, mortgage SVR rates vary wildly and it was simply down to pot luck which lender you were with when the music stopped in 2008. Base rate cuts may be a stimulus at city level, but not at street level. You want to get people spending? Then regulate lending practices far more than you are right now. I don’t mean the advice I mean the lending rates. If base rates reduce, banks are unlikely to pass it on, so we are relying purely on their benevolence or competitive spirit, but for borrowers and businesses that are effectively trapped by circumstance, this offers no solace whatsoever.

    Everybody’s trying to fix the financial system when ultimately it is reliant on the activities of end users – and long term it can only be the end users (i.e. consumers, SME’s ,etc) that will bring this ongoing financial crisis to an end.

    The current focus is all wrong, which is why the divide between the 1% and the rest of the world is continually increasing.

    What is needed is a total rethink – not more of the same medicine.

    Yours sincerely,

    Elephant

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