Carney: Inflation likely to fall below zero

Carney: inflation

In a letter to the chancellor to explain CPI inflation falling to 0.5% in December, Mark Carney stated that the central bank’s projections show inflation dipping to zero in the second quarter of the year and remaining “close to zero” for most of the year.

An accompanying BoE report added that “it is now more likely than not that CPI inflation will dip briefly below zero at some point in the first half of 2015”.

In his letter, Mark Carney said:

"Inflation is at its lowest level since the introduction of Inflation Targeting two decades ago. It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year."

The MPC judged that roughly two thirds of the weakness in inflation relative to the target can be explained by unusually low contributions from energy, food and other goods prices. The remainder reflects more generalised subdued inflationary pressures resulting from weak growth in domestic costs. The fall in the oil price over recent months means that inflation is likely to fall further in the near term, and could temporarily turn negative.

However Carney remained confident that inflation could return to its 2% target within two years.

He said that as domestic pressures start to pick up, and as a steady expansion in demand absorbs the remaining economic slack, it is currently appropriate to set policy so that it is likely that inflation will return to the 2% target within two years. Under the assumption that Bank Rate rises gradually over the forecast period, he said that this target is "likely to be achieved".

Peter Brodnicki, Chief Executive of Mortgage Advice Bureau, said:

"Interest rates are predicted by many to remain unchanged until at least the 4th qtr, that is now likely to move into next year with inflation at these levels, with further falls in inflation likely and the real possibility of deflation as in the Eurozone.

"Wage inflation is generally slow and not likely to race away, and property price inflation has definitely slowed, and so right now it is hard to see when rates will actually rise but I think you can definitely rule out any time this year."

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