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Carney: It would be ‘foolish’ to cut rates to tackle low inflation

Written by: Alice Rigby
Mark Carney has told MPs it would be ‘extremely foolish’ for the Bank of England to cut interest rates further in order to combat falling inflation.

Addressing the House of Lords Economic Affairs Committee, Carney (pictured), reiterated his view that the falling oil price is a temporary factor affecting consumer prices.

He suggested, because the oil price fall is a short-term shock to the economy, any measures taken by the Bank are likely to have a negative impact, the BBC reports. “The impact of that extra stimulus…would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility to inflation. The thing that would be extremely foolish would be to try to lean against this oil price fall today,” he said.

The Bank governor expects inflation could fall to around zero in the coming months and remain there for some time, after the dramatic crash in oil prices pulled prices down. He has previously suggested the UK could even experience a short period of deflation.

Inflation fell to 0.3 per cent in January, well short of the Bank’s 2 per cent target, prompting Carney to write an explanatory letter to the Chancellor.

Earlier in the year, the Bank had said rates could drop further if inflation remained low. However, after the latest inflation figures were released, it said it believes inflation will return to target in the next two years.

Carney added the Bank is sensitive to a change in consumer mood prompted by a change in the prices, which would likely appear in the form of falling wages and lower business investment.
“We have to be vigilant to the possibility that a period of slow prices starts to change expectations,” he said.

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