Mark Carney, Bank of England's governor, has cautioned that interest rates may rise earlier than the City expects, although the Bank of England expects that inflation will become negative for the first time in more than half a century, The Guardian reports.
In its February inflation report, the Bank said that the plunge in oil prices and falling food prices is likely to push inflation to zero in the second and third quarters, probably dipping into negative territory for one or two months.
However, Carney considers negative inflation in the UK would not lead to the dangerous deflationary spiral feared in the eurozone. In December UK inflation was 0.5% - well below the Bank’s 2% target.
New data in the Bank’s latest inflation report suggested lower oil prices – which have more than halved since last summer – will significantly boost consumer spending. This in turn will spur growth and incentivise inflation higher over the medium term.
Since March 2009, interest rates have been held at an all-time low of 0.5%, and markets had been forecasting the first rise would come in early 2016.
The Bank left its 2015 growth forecast unchanged at 2.9%, but raised its forecast for 2016 to 2.9%, up from 2.6% three months ago. It also lefted its estimate for 2017 to 2.7% from 2.6%.
In his letter to Osborne Carney said that the Bank is ready to cut interest rates further and pump more money into the economy through quantitative easing in case low inflation persists for longer than expected and the global economy is weaker.
“To the downside the fall in near term inflation could be more persistent than the committee currently expects."
“In that case the MPC would need to provide more support to returning inflation to the target over the appropriate horizon.”
One option would be an even more gradual increase in interest rates than the City expects but, Carney added that the committee could also decide to expand the asset purchase facility or to cut Bank rate further towards zero, The Guardian reported.
