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Massive fall in inflation predicted

Written by Gary Howes

Wednesday, 12 November 2008

Bank of England says inflation may hit the 2% mark in 2009 - but caution is still advised.

The Bank of England has today said it expects sharp falls in inflation following the onset of global recession.

However it was quick to point out that its predictions should be approached with caution as its analysis depends on data that existed prior to the historic rate cut made last week.

The Bank also pointed out that the UK economy was headed into unchartered economic waters.

Nevertheless, indications would suggest that the UK economy could expect to see a 2% rate of inflation in 2009, leading some to suggest further interest rate cuts could be expected.

However economists have pointed out that the aforementioned caution must be taken into consideration - as must a crashing pound - which has suffered due to the low returns investors are now faced with on the money market thanks to the rate cut.

In this mornings statement the Bank was also quick to point out that its approach to setting monetary policy remained the same.

This putting paid to speculation that the Bank of England could be entertaining a more dynamic approach to inflation and interest rate management.

Pound decline benefits negated

Yesterday the pound was at a 12 year low against a basket of currencies. Normally this would provide a good opportunity for exporters to boost their income as outside demand for their goods increases as the goods become cheaper.

However the Bank has suggested that the global nature of the economic slowdown could negate any benefits until 2009.

Their central projection assumes that global growth begins to recover during the course of 2009, as the benefits of policy easing work through and credit conditions start to improve.

But there are risks on both sides of this central case. On the upside, the policy actions taken in many countries to stabilise banks and financial markets may trigger a more rapid bounceback in confidence. On the downside, the interaction between tight credit, weak balance sheets and subdued spending may be more drawn out.