BoE's Miles says UK a long way from falling into deflation trap

[EDINBURGH] The sharp fall in British inflation does not raise the risk of damaging deflation and the Bank of England does not need to resume buying government bonds in response, a policymaker at the central bank said on Thursday.

David Miles, who was one of the BoE's most vocal supporters of stimulus to help the economy during and after the financial crisis, also said the slowing of inflation meant there was no great urgency to start raising interest rates.

Britain's inflation rate touched 0.5 per cent in December, according to the consumer price index, its lowest level in more than 14 years.

The fall in British inflation was more a reflection of the plunge in global commodity prices, such as oil, and the effect of a strengthening of sterling last year than of deflationary forces in the country's economy, Mr Miles said in a speech.

"So although actual inflation rate is now very low, and might temporarily dip down to zero and turn slightly negative, this is a long way from the sort of deflation trap that is really worrying," he said.

"This fall in inflation, rather than increasing the burden of debt in a way that can become self-reinforcing in a downwards spiral, is boosting the disposable income of households and making the burden of debt easier."

Although domestic costs were rising weakly and wages were flat when measured alongside productivity, "I don't think this really adds up to a strong case for looking to monetary policy to boost demand and prices right now," Mr Miles said.

On Wednesday, minutes of the BoE's most recent policy meeting showed the two proponents of an immediate increase in borrowing costs had reversed their position and rejoined their colleagues in voting to keep rates on hold.

That prompted investors to push the expected date of a first post-crisis rate hike well into 2016. Britain's main interest rate has been at 0.5 per cent for nearly six years.

While quantitative easing had helped Britain's economy through the financial crisis, financial markets were now operating more normally and banks were in better financial health, said Mr Miles, lessening the need for more such stimulus.

QE - huge purchases by a central bank of government bonds with new money - was also less needed and possibly less effective when inflation is low than during times of high inflation, as was the case when it was launched in Britain.

The European Central Bank is expected to announce on Thursday its own bond-buying stimulus plan to try and avert the threat of the eurozone falling into a deflationary trap.

Low inflation in Britain does mean that the Bank of England should be in no rush to raise interest rates, said Mr Miles.

"I don't think that lower inflation than seemed likely six months ago means that more expansionary policy is now needed; but it does mean that there is no great urgency in starting the process of moving monetary policy back towards a more normal setting," he said.

REUTERS