By Judith Ugwumadu | 12 February 2015
UK inflation could turn negative in the spring and remain at zero for the rest of the year, Bank of England governor Mark Carney has warned. He insisted he would cut interest rates further if needed.
In an open letter to Chancellor George Osborne, the governor said the UK was ‘not experiencing deflation’ but the bank would be prepared to lower interest rates below its current 0.5% to prevent it.
The most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices, he said.
‘In the absence of continuing falls in commodity prices, negative inflation rates are unlikely to endure for very long, however. On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year,’ Carney said.
‘Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households’ real take home pay, particularly if wages are growing. This is clearly the case in the UK at the moment.’
He said the bank’s objective was to maintain price stability and to support the economic policy government policy, including its objectives for growth and employment.
Price stability is an essential pre-requisite for economic prosperity, he said. ‘The bank is acting to return inflation to the target promptly by eliminating the remaining margin of slack in the economy.’
