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.
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.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.