LONDON (AP) — The Bank of England said Thursday there is a good chance the U.K. may experience a period of falling prices this year and that this is good news for the economy.
Slowing inflation is largely due to falling oil and food prices, which will put more money into consumers' pockets, Governor Mark Carney said in the bank's quarterly forecast. The bank also raised is outlook for economic growth for next year to 2.9 percent, from 2.6 percent.
The inflation rate is "more likely than not to turn negative at some point in the spring," Carney said. "But as unusual as that is, it arguably isn't the main story. The headlines today mask stronger underlying dynamics which will determine U.K. output and inflation tomorrow."
If price declines become more widespread, raising the specter of long-term deflation that could threaten economic growth, the bank is ready to act, Carney said. This could include cutting interest rates from the record-low 0.5 percent and pumping more money into the economy.
For the moment, the bank will "look through" what it sees as temporary drops in food and fuel prices and focus on the broader economy, Carney said.
With inflation below the central bank's 2 percent target rate and unemployment above its long-run sustainable level, Carney said there was a "trade-off between returning inflation to target and supporting economic activity."
Since it takes time for monetary policy to filter through to the economy, there is little policymakers can do to counter short-term trends.
Aberdeen Asset Management Chief Economist Lucy O'Carroll said Carney is hedging his bets, and watching larger global developments, such as Greece's effort to renegotiate its debts, which may slow the recovery in the eurozone.
"Broadly, this is a sensible message," she said. "The governor is wise to give himself room for maneuver if things get worse."