Britain sliding towards negative inflation and interest rate rise

The UK is edging towards negative inflation for the first time in more than fifty years, the Bank of England has said and should be prepared for a rise in interest rates.

The dramatic fall in the price of oil as well a drop in food prices means that inflation is likely to reach zero during the second and third quarters of this year.

Although inflation may even reach negative figures for a month or two during the second quarter of 2015, the UK’s current strong economic growth should mean that a deflationary spiral is avoided, the Bank of England has said in its latest inflation report for February.

The last time Britain had negative inflation was 55 years ago, in March 1960, according to figures from the Office of National Statistics.

Inflation was as low as 0.5 per cent at the end of last year, substantially below the Bank of England’s target of 2 per cent. Governor of the Bank, Mark Carney, said in the quarterly report that inflation will fall further, possibly reaching negative figures in the spring and staying at zero for the rest of the year.

The Bank has revised its forecasts for growth during the next two years which has helped to strengthen the pound against the euro. Sterling is now at its highest point against the Eurozone currency for seven years, with one euro now worth 73.71 pence.

The slump in the price of oil and food should keep inflation down in the short term but lower oil prices are expected to increase consumer spending which should in turn boost economic growth and push inflation upwards in the medium term.

Carney said that the fall in the price of oil was ‘unambiguously’ beneficial for the global economy and that borrowers should be prepared for an interest rate rise. Rates have remained at 0.5 per cent since March 2009.