Negative inflation likely in Britain, reveals Bank of England

Latest inflation report from the Bank of England forecasts negative inflation in the UK and the potential to cut rates further.

The UK is headed for negative inflation, growth forecasts have been upgraded, and the governor of the Bank of England (BOE) warns that rates could be cut further if downside risks prevail - the latest inflation report from the UK's central bank had it all.

The report forecast that Britain is heading for falling consumer prices for the first time since 1960, driven lower on the back of collapsing global oil prices.

"We're going to have a period where headline inflation is low - very low - for most of this year, and that's a good thing in general because of the causes of it. It's not a good thing if it persists though," said Mark Carney, governor of the BOE.

Mr Carney stressed that the UK should be preparing for a coming rate rise, but he also noted that the BOE remains vigilant of downside risks that could require cutting rates below the historic low of 0.5 per cent or to expand the quantitative easing program further.

However, markets were buoyed by the fact that the bank believes the inflation rate will return to the long-term target of two per cent sooner than previously expected. Furthermore, the BOE upgraded its predictions of economic growth in the UK for last year and the next.

Mr Carney noted that the fall in oil prices was “unambiguously” beneficial for the economy in the UK and that: “The combination of raising wages and falling energy and food prices will help household finances and boost the growth of real take-home pay this year to its fastest rate in a decade, this will support solid growth in consumer spending."

As such, the BOE believes the British economy grew by 3.1 per cent in 2014, which is much stronger than the 2.6 per cent rise reported by the Office for National Statistics, and forecasts GDP growth to be 2.9 per cent in 2016. However, for this year, the BOE’s prediction is unchanged at 2.9 per cent.