A strong pound has increased the chance of a prolonged period of very low inflation, leaving the Bank of England in no hurry to raise interest rates, its senior policymakers suggested.
The Bank’s rate-setting monetary policy committee said stronger growth prospects for the UK and a €1.1tn quantitative easing programme in the eurozone could push the pound higher.
UK inflation is at an-all time low of 0.3% and is expected to turn negative in the coming months for the first time in more than half a century. Mark Carney, the Bank’s governor, has insisted this will not amount to a period of dangerous deflation, where prices falls become entrenched.
However, minutes of the March MPC meeting showed members are now concerned that a persistently strong pound could keep inflation well below the Bank’s 2% target for a prolonged period.
The MPC noted: “Though monetary policy at home and abroad was only one of the many factors that influenced the exchange rate, especially in the near term, there was a risk that divergent monetary policy trends, as well as stronger prospects for growth in the United Kingdom than in the euro area, might continue to put upward pressure on the sterling exchange rate.
“This had the potential to prolong the period for which CPI inflation would remain below the target and exacerbate the risk that lower expectations of inflation might become more persistent.”
