BRITAIN'S inflation rate could temporarily turn negative this spring because of the plunge in oil prices, Mark Carney, the Governor of the Bank of England, has signalled.
Launching the Bank's latest Inflation Report in London, he described the halving of the oil price since last summer as "unambiguously good" for the UK economy even though the impact on the North Sea oil industry has been particularly harsh with thousands of job losses.
The Governor again highlighted the importance of UK risk-sharing and suggested the impact on the Scottish economy of low oil prices would have been 10 times greater if Scotland had been independent.
His remarks echoed those he made last month when Mr Carney told MPs that while the oil price fall would harm Scotland's economy, which would take a "hit", it would be good for the rest of the UK. But he noted how the negative impact north of the border would be "substantially mitigated" by the fiscal arrangements across the UK.
The Bank chief also appeared to bring forward the prospect of a rise in interest rates even as he said they could be cut further should low inflation persist.
The Consumer Price Index(CPI) measure, he explained, was "more likely than not" to turn negative in the spring.
Yet the pound rose as Mr Carney noted: "Unusual as that is, it arguably isn't the main story. The headlines today mask stronger underlying dynamics, which will determine UK output and inflation tomorrow."
Mr Carney said the next move in monetary policy was still judged most likely to be a rise in interest rates.
The Bank's quarterly report nudged up expectations for CPI at the end of the coming three-year period, predicting that the factors currently pushing it lower would fade and lifting forecasts for wages and economic growth.
Sterling climbed to a seven-year high against the euro while it was also up by a cent against the US dollar as economists said the Governor had left the door open for an interest rate hike before the end of this year.
The forecast for inflation over the next few years contrasted with near-term predictions, suggesting CPI would average around zero in the second and third quarters of this year, before starting to climb before the end of 2015.
In a letter to Chancellor George Osborne published alongside the Inflation Report, Mr Carney said the UK was not experiencing deflation in the "persistent and generalised" sense.
"The economy is growing strongly, unemployment is falling and earnings growth has been picking up in recent months," he wrote.
The Governor was obliged to write the letter because inflation had veered more than one per cent off the Bank's two per cent target. Mr Carney said he would "likely write a few more before the year is out".
Vicky Redwood of consultancy Capital Economics said: "February's Bank of England Inflation Report confirmed that deflation is now on the horizon but that it will be fairly short-lived.
"Indeed, the stronger medium-term inflation forecast was a warning to financial markets that they may have pushed their expectations for the first rate hike too far into the future.
"In fact, with the Monetary Policy Committee fairly relaxed about the prospect for deflation, we still think that there is a reasonable chance of a hike before the end of this year and scope for market expectations to adjust further," she added.
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