Worries about the UK’s economy entering into a deflationary spiral stayed the hand of two Bank of England board members who had wanted an early interest rate rise.
Martin Weale, an inflation hawk and independent member of the monetary policy committee, wrote an article for the Observer, in which eh explained the reasons for his change of heart. Since August 2014, Weale and Ian McCafferty, another committee member, had voted for a rate hike as strength came back to the economy.
In his reasoning, Weale wrote that falling oil prices will continue to hold prices down for a long time.
The single biggest explanation of very low inflation is the decline in the price of oil. Since the inflation rate is measured by looking at the change in prices over 12 months, inflation is likely to stay very low until the sharp fall in oil prices lies more than a year in the past. In fact, because not all prices adjust as rapidly as does petrol, the impact is likely to linger for longer than this.
With oil prices only just up from their nadir, it is possible, Weale continues, that people will assume the lower prices will continue into the future, leading them to put off spending. This could lead to a deflationary spiral, where the prospect of deflation defers spending, leading to more deflation.
Mark Carney, the governor of the bank of England, has played down the risks of a deflationary slump and said that the Bank is still able to use more weapons in the defence of a strong economy – including cutting interest rates from their historic low of 0.5 per cent.