Governor to predict near zero inflation
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 said there is a strong chance that the Consumer Price Index (CPI) rate of inflation will turn negative this year.
The latest figures show that the CPI fell to 0.5 per cent in December, equalling its lowest level on record, and meaning Carney must write a letter to the Chancellor to explain why it is more than one per cent off its two per cent target.
It has been driven down by tumbling oil prices and the lower cost of petrol, as well as the supermarket price war.
The letter, the first Carney has been obliged to write since he took the helm 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 Bank's first deflation report
He added: "It could be the Bank's first deflation report."
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 Carney's remarks for clues to when the Bank's Monetary Policy Committee (MPC) may act to hike interest rates above 0.5 per cent, where they have been for six years. Speculation is focused on whether there is any possibility of an increase this year or whether it will be pushed back into 2016.
Carney said 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 fall in the oil price is itself seen as providing a major stimulus to the economy, as the lower price at the pumps feeds through to a boost in spending power.
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."
