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[LONDON] Bank of England Governor Mark Carney on Friday played down the risk that Britain could fall into a deflationary trap, saying it was best to look through falling oil prices at a time when British wages are growing.
The BoE would still need to gradually increase interest rates over the course of the next three years, if it was to stop inflation from overshooting its 2 per cent target, he said in a newspaper interview in Davos, Switzerland.
Oil prices have more than halved since the middle of last year, pushing British inflation to a 14-year low of 0.5 per cent and causing two BoE policymakers to drop their calls for higher interest rates this month.
But Mr Carney said this tumble in oil prices should not determine the medium-term path of monetary policy against a backdrop of continued robust economic growth in Britain. "It is appropriate to look through those dynamics at a Mr ney told the New York Times.
Inflation was likely to return to 2 per cent within two years, he said. "That would be consistent with some modest, limited, gradual increases in interest rates over the course of the next three years," he added.
Earlier on Friday, Mr Carney said he welcomed the bond-buying plan unveiled by the European Central Bank on Thursday. "(The plan is) absolutely necessary to preserve the prospects of medium-term prosperity in Europe. This doesn't deliver medium-term prosperity, it just creates the conditions for it," he told a panel at the World Economic Forum in Davos.
But there was still a risk of persistently low inflation in continental Europe, Mr Carney told the newspaper, adding that Britain's situation was not comparable because there were not concerns about a "generalised move in prices down".
Mr Carney said British inflation could also fall further, and that he expected British wage growth to continue, although he said he would like to see more evidence of this.
The central bank will publish new economic forecasts next month.