The Bank of England (BoE) has forecast that the UK will soon fall into deflation, but insisted inflation was still likely to return to its 2 per cent target within two years.
The BoE’s latest inflation report said that after hitting 0.5 per cent in December, “inflation is likely to fall further in the near term, and could temporarily turn negative”.
The central bank said three quarters of the fall in inflation seen in 2014 was due to “unusually low contributions from energy, food and other goods prices”, and it expects such downward trends to continue into 2015.
The BoE’s fan chart of predicted outcomes for the rate on inflation suggests its base case is for deflation throughout the spring before a recovery kicks in for the second half of the year.
Not only did the central bank not commit to a timetable for raising its base interest rate, but it has now also mentioned that it would consider cutting the rate to below 0.5 per cent if economic conditions deteriorate.
But the BoE implied that the current market expectation for the start of rate rises, early 2016, was fairly accurate if conditions remain the same.