B.o.E. Worried over Deflationary Risks

Bank of England wakes up with a cup of deflation fears

Feb. 24 (Bloomberg) — Bank of England policy maker Andrew Sentance said the U.K. may experience deflation if the recession intensifies, adding to the case for authorities to buy assets to bolster the economy.

“If the recession is prolonged and deep, there is an increased risk of deflation,” Sentance said in a speech at the Institute of Economic Affairs in London today. While “persistent” price declines “remain an outside risk,” there is “a strong case for providing additional stimulus to the economy to head it off more decisively.”

The Monetary Policy Committee this month unanimously agreed to ask the government for authority to create money after cutting the benchmark interest rate to 1 percent, the lowest ever. Policy makers’ reductions in borrowing costs should start to take effect by the middle of the year, Sentance said today.

“Our experience of the current recession in the U.K. is not, so far, out of kilter with earlier postwar recessions,” Sentance said. “The risks are still weighted to the downside at this stage.”

The Bank of England’s forecasts, published Feb. 11, show the economy will contract at an annual 4 percent rate by the end of the first quarter and inflation will slow to 0.5 percent at the end of next year. The central bank aims to keep annual price gains at 2 percent.