Bank of England governor Mark Carney has told Chancellor George Osborne that the base rate may be pushed below its historic low of 0.5% to stop Britain entering a deflationary spiral.
Carney’s announcement was made in a letter he was forced to write to the Chancellor explaining why inflation had dropped to more than 1% below the Bank's 2% target.
After falling oil prices drove inflation down to 0.5% in January, two members of the Monetary Policy Committee who had previously campaigned for the base rate to rise were forced to back down.
MPC hawk Martin Weale warned that if low expectations of inflation were to become entrenched, there could be a risk that the UK would sink into a “deflationary spiral”, with wages and prices falling.
While this would almost certainly reduce monthly payments on variable rate mortgages, keeping up with home loans could become harder if wages slide.
It could also mean consumers will start putting off purchases of big-ticket items if they believe goods and products will get cheaper in the future.
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