Bank of England reports on inflation

On Wednesday (May 13th), the Bank of England released its quarterly report on the UK economy.

Speaking about the latest results, governor Mark Carney said that the bank has cut its 2015 growth forecast from 2.9 per cent to 2.5 per cent. Next year, the expected growth has also been cut from 2.9 per cent to 2.6 per cent.

Interest rates are expected to rise in about a year's time.

Possibility of deflation

Mr Carney said that deflation would emerge during the year – but he also expects inflation to pick up towards the end of the year. February and March this year saw zero per cent inflation, as measured by the consumer prices index. This was well below the bank's two per cent target, reports the BBC.

A fall in energy prices, lower food prices and strong sterling were all named as reasons for falling inflation. Mr Carney said that these explain about three-quarters of the drop.

He also indicated that he was not worried about the low inflation rate, saying that factors contributing to the low levels would not last long.

"A temporary period of falling prices should not be mistaken for widespread and persistent deflation," he said, adding that the economy was growing.

He believes inflation should return to its two per cent target within two years.

Wages and unemployment

The Bank of England has also downgraded expectations for 2015 wage growth – from 3.5 per cent to 2.5 per cent.

However, the country's unemployment rate is expected to fall faster than previously thought. Unemployment fell to 5.5 per cent in the three months to March and the bank believes the rate will fall to 5.2 this year – and it could go below its "natural" rate of five per cent by 2017.

Greece

Although the UK has reduced its exposure to Greece, the Greek financial crisis does still pose a risk to the British economy.

The Bank of England's inflation report explained: "The possibility of a disorderly resolution of Greek debt negotiations is judged to pose a downside risk to euro-area and UK growth for much of the forecast period."

Mr Carney said that if the Greek crisis intensified, it would have an impact on global growth and a modest impact on UK growth.

"European policy makers are making heroic efforts to avoid that situation," he said.