Britain set for deflation, warns central bank

12th February 2015, Comments 0 comments

Inflation in Britain could turn negative within months and interest rates cut, Bank of England governor Mark Carney said Thursday, signalling fresh risks to the economy before the country's election.

"Inflation... will likely fall further, potentially turn negative in the spring and be close to zero for the remainder of the year," BoE chief Carney said at the unveiling of the central bank's latest quarterly economic forecasts.

The BoE could also expand its quantitative easing (QE) stimulus programme of pumping new money into the British economy, should it be needed, the Canadian national added.

The European Central Bank recently launched its own QE policy to combat deflation, or a prolonged period of falling prices, in the eurozone. Britain is not a member of the 19-nation bloc but counts the neighbouring eurozone as its biggest trading partner.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

The BoE on Thursday forecast that the 12-month Consumer Price Index (CPI) inflation would average at about zero in the second and third quarters of 2015, before climbing at the end of the year.

At the same time however, the bank upgraded its 2016 and 2017 economic growth forecasts, citing the lift from lower crude oil costs. The economy was set to grow 2.9 percent in 2016 and 2.7 percent in 2017. That compared with prior forecasts of 2.6 percent in both years.

- Record-low rate -

Last week, the BoE's monetary policy committee (MPC) held its main lending rate at a record-low 0.50 percent, where it has stood for nearly six years, amid fears of deflation and slowing economic growth.

Policymakers had decided also to maintain the level of QE stimulus at £375 billion ($571 billion, 500 billion euros).

"On the downside, the MPC is vigilant to the risks of disappointing global growth or any signs that low inflation begins to affect inflation expectations and wage growth, and therefore becomes self-reinforcing," Carney said Thursday.

"Were these downside risks to materialise, the Committee could adjust the pace and degree of bank rate increases, expand the asset purchase facility, or cut bank rate further towards zero."

Recent data showed that British inflation dived in December to a record low of 0.50 percent on collapsing world oil prices, which tumbled by 60 percent between last June and January.

"The main reason for this was the steep fall in wholesale energy prices during the second half of last year," the BoE added in its quarterly report.

"Inflation is likely to fall further in the near term, and could temporarily turn negative, as falls in energy prices continue to be passed through.

"Inflation is likely to rebound around the turn of the year as these effects drop out of the annual rate."

January inflation data is scheduled for publication next week.

The BoE's main task is to keep annual inflation close to a government-set target level of 2.0 percent.

Recent mixed data showed that Britain's economy grew in 2014 at the fastest annual pace since before the financial crisis -- but experienced a fourth-quarter slowdown.

Gross domestic product expanded by 2.6 percent last year, the best annual figure since 2007, but rose by just 0.5 percent in the October-December period.

That was the weakest quarterly rate in a year and comes ahead of the looming general election due in May.

"The BoE's latest inflation report has confirmed that the MPC thinks that deflation is now on the horizon," noted Capital Economics analyst Vicky Redwood.

"However, Mr Carney downplayed the significance of this -- in fact, the fall in oil prices and market interest rates has prompted the MPC to revise up its growth forecasts for 2016 and 2017."

© 2015 AFP

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