BoE will cut interest rates if inflation outlook worsens

The Bank of England sees little need to raise interest rates this year, and stands ready to cut them if inflation dips more deeply into negative territory than expected, a new set of forecasts showed yesterday.

BoE governor Mark Carney said he expected inflation to fall below zero in the coming months due to tumbling oil prices that are nearly at a six-year low, but stressed that this by itself did not mean that the economy had entered deflation.

“The UK is not experiencing ‘deflation’,” Mr Carney said in a letter to chancellor of the exchequer George Osborne explaining the difference between inflation —which stood at 0.5% in its most recent reading — and the bank’s 2% target.

However, if global activity weakened and Britain became at risk of a vicious cycle of falling prices, the BoE said it was ready to cut rates. Previously, it had said this would be of little benefit, and maintained some lenders were too weak to cope with rates below 0.5%.

“The MPC stands ready to take whatever action is needed, as events unfold, to ensure inflation remains likely to return to target in a timely fashion,” he said.

However, the overall thrust of the central bank’s quarterly inflation report was upbeat, with the economy close to being back to running at full capacity.

* Reuters