Carney to slash inflation forecast

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Published: Sunday 8th February 2015 by The News Editor

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Mark Carney will slash the Bank of England’s inflation forecast near to zero this week when he publishes an updated outlook for the UK economy.

The Bank’s governor has already acknowledged there is a strong chance that the Consumer Price Index (CPI) rate of inflation will turn negative this year.

Latest figures showed CPI fell to 0.5% in December, equalling its lowest level on record, and meaning Mr Carney must write a letter to the Chancellor to explain why it is more than 1% off its 2% target.

It has been driven down by tumbling oil prices, lowering the cost of petrol, as well as the supermarket price war amid fierce competition in the sector.

The letter, the first Mr Carney has been obliged to write since he took the helm at Threadneedle Street in the summer of 2013, will be published alongside the Bank’s quarterly Inflation Report on Thursday.

Simon Wells, chief UK economist at HSBC, said the Bank’s new report “may be the first to show a central projection for inflation that is, in some quarters, negative”.

“It could be the BoE’s first deflation report,” he added.

Mr Wells pointed out that since the Bank’s prediction last month of a “roughly even” chance of negative inflation, there had been further downward pressure on the CPI forecast as household energy tariffs were cut.

He said the Bank might make its first ever forecast of “outright deflation”, for the second quarter of this year.

Analysts will study the report and Mr Carney’s remarks at a press conference for clues about when the Bank’s Monetary Policy Committee (MPC) may act to hike interest rates above 0.5%, where they have been held for six years.

Speculation is focused on whether there is any possibility of an increase this year or whether it will be pushed back well into 2016.

Low inflation has removed pressure for an increase, with even the MPC’s two “hawks” reversing their calls for a rise last month, as the Bank judged there was a “roughly even” chance that inflation would dip below zero in the first half of 2015.

Mr Carney said in a recent speech in Dublin that falling petrol prices in the pipeline meant that inflation “is likely to fall further over the coming months and turn slightly negative for a period”.

He has said that the fall in inflation is “good news in the short term” for UK households as it boosts spending power but acknowledged the dangers that could be posed by it turning negative.

The fear from deflation is that it could result in a damaging downward spiral as households postpone spending and firms delay investment as they expect prices to fall.

Markets have pushed back expectations of an interest rate hike because of the Bank’s obligation to bring CPI back up to a more normal level.

Jitters over the eurozone – as the Greek debt crisis resurfaces – and the UK general election also seem to boost arguments to leave rates low in order to keep the economic recovery on track.

However, Bank policy makers will also have to “look through” temporary effects to see the path for inflation further down the track, particularly considering the prospect of improving wage growth.

Meanwhile, fears of a slowdown in the UK economy – after growth slowed more sharply than expected to 0.5% in the fourth quarter – have been partly allayed by latest economic surveys pointing to a healthy start to 2015.

The fall in the oil price is itself seen as providing a major stimulus to the economy as it feeds through to a boost in spending power.

Mr Wells added: “Beyond 2015, inflation should bounce back as the impact of cheaper oil drops out of the annual comparison and, given faster growth, it is possible the MPC will nudge up its inflation forecast for 2017.

“While we do not expect any signals that rates might rise in 2015, the report may drop a hint that markets could have got too complacent that rates will be on hold until deep into next year.”

Howard Archer, chief UK and European economist at IHS Global Insight, said: “We currently believe it is borderline as to whether the Bank of England starts to raise interest rates at the end of this year or holds fire until early 2016.”

Published: Sunday 8th February 2015 by The News Editor

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