UK inflation will recover towards the government target of 2% by 2017, according to Bank of England governor Mark Carney.
Carney told delegates at the World Economic Forum in Switzerland, that this was a realistic target due, in part, to signs of growth in wages helping the Bank of England avoid a prolonged period of deflation.
“We have a very low inflation environment right now largely caused by commodity prices and an ability to look through that” said Carney. “We have the responsibility; we have the means and the will to return inflation back to target within the two-year horizon.”
Last month, inflation dipped to a historic low of 0.5%, amid tumbling oil prices, and sparking fears that the UK could enter a period of damaging deflation.
This led to Carney having to write to Chancellor George Osborne to explain why inflation was outside the government target of within a percentage of 2%.
The Bank of England’s Monetary Policy Committee believes annual inflation will continue to fall in the coming months, possibly even turning to negative figures, before then increasing as oil prices either stabilise or begin to rise, in addition to wages increasing.
“With unemployment dipping to below 6%, the UK appears to have prevented the 2008 financial crisis and the Great Recession that followed from creating a lost generation of unemployed citizens, as has occurred in France and several Eurozone nations” Mr. Carney added.
“It is not lost on us that wages are picking up now in the most recent data and are consistent with our expectations” hinting that the MPC is perhaps more optimistic that many outside analysts, over inflation reaching the targeted 2% within two years.
The Governor also welcomed the European Central Bank’s announcement of an €1.1bn (£822m) Quantative Easing (QE) programme last week, in order to encourage spending and keep interest rates low.
As part of the programme, the ECB will purchase bonds worth €60bn monthly from banks, which they hope will expand money supply, in turn maintaining low interest rates and boosting spending.
There was one parting shot of caution from Governor Carney, however, as he warned of the potential pitfalls of such a plan.
“QE needs to be closely monitored, because governments and traders may be tempted to take financial risks. This could be catastrophic and could in turn trigger another global financial crisis.”
Article By: Mark McBurney, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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