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Bank of England report signals possibility of deflation

14 May 2015

The Bank of England (BoE) has downgraded its UK growth forecasts for 2015 and warned that the economy could slip into deflation, in its latest quarterly inflation report.

The report suggests that the UK economy will grow by 2.5% in 2015 and 2.6% in 2016, compared with previous BoE predictions of 2.9% for both years.

Inflation remained at 0% in March, for the second month in a row - a trend which the BoE put down largely to a sharp fall in energy prices, lower food prices and the strength of sterling.

BoE Governor Mark Carney has warned that the economy could slip into deflation in the coming months. However, he emphasised that any period of falling prices was expected to be short-lived, with inflation expected to pick up ‘notably’ as the year progresses, reaching 0.7% by the end of 2015, 1.7% in 2016 and slightly exceeding the BoE’s 2% target by the end of 2017.

Interest rates are expected to rise from 0.5% to 0.75% in around a year’s time.

The news has prompted the British Chambers of Commerce (BCC) to call for greater clarity from the Monetary Policy Committee (MPC).

David Kern, Chief Economist at the BCC, said, ‘The Bank’s inflation forecast is broadly in line with our own, including their assessment that inflation will not increase above its 2% target until 2017. With inflation remaining low and more needing to be done to secure the recovery, the MPC should confirm that it will not consider increasing rates in the foreseeable future’.