Dr Dennis Novy warns of risk to UK economy because of low inflationTuesday 13 Jan 2015
Dr Dennis Novy has warned that there is a risk for the UK economy with inflation in the UK on a downward trend as it was confirmed at 0.5% this morning.
It was widely expected to fall below 1 per cent, and with official figures confirming UK inflation at 0.5%, this is the first time since 2002 it has been that low. This will likely trigger a letter of explanation from Mark Carney to George Osborne, the first of this kind, because inflation is too low.
Dr Novy said:
“There are several reasons for low inflation. The price war among supermarkets, the falling oil price and weak demand all have played their part.
The Bank of England is under pressure. With inflation falling, interest rates should normally be reduced. But they have been at rock bottom for nearly six years now and cannot be cut further.
There is a risk for the UK economy. Inflation is inching close to the danger zone of outright deflation. Once prices stop rising, consumers and businesses delay spending and can pull down the economy. If that happens, it would be time for the Bank of England to have another look at unconventional measures such as quantitative easing.
Many voices, especially from the City, have long called on the Bank of England to finally raise interest rates. But the latest inflation numbers and weak wage growth make higher interest rates unlikely any time soon.”
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