Bank of England eyes interest rates as inflation set to drop below zero
Bank of England issues upbeat quarterly inflation report though says it's ready to reverse course and cut rates as other central banks have done
The Bank of England sees little need to raise interest rates this year, and stands ready to cut them if inflation dips more deeply into negative territory than expected, a new set of forecasts showed yesterday.
Bank governor Mark Carney said he expected inflation to fall below zero in the coming months due to tumbling oil prices that are nearly at a six-year low, but stressed that this by itself did not mean that the economy had entered deflation.
"The UK is not experiencing 'deflation'," Carney said in a letter to finance minister George Osborne explaining the difference between inflation - which stood at 0.5 per cent in its most recent reading - and the Bank's 2 per cent target.
However, if global activity weakened and Britain became at risk of a vicious cycle of falling prices, the bank said it was ready to cut rates, following in the footsteps of other central banks that have taken emergency policy action. This is a major break from its previous position, where it had said this would be of little benefit, and that some lenders were too weak to cope with rates below 0.5 per cent.
"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 said.
However, the overall thrust of the central bank's quarterly Inflation Report was upbeat, with the economy close to being back to running at full capacity.
