BOE inflation report sends sterling soaring

The UK could see the consumer price index fall into negative territory for the first time in over 50 years, according to the Bank of England’s (BOE’s) latest inflation report.

Falling prices haven’t been seen in Britain since 1960 and could start a period of deflation, if the negative inflation persists. However, in the meantime, consumers will effectively have more money in their pocket.

The BOE also updated its outlook on the UK economy and surprised markets by predicting that GDP last year grew by 3.1 per cent, which would be the best economic performance since 2003. Growth forecasts for this year and next year were also upgraded.

Sterling soared on the news to record its best daily session in over a year, fueled by the bolstered GDP figures and by the bank’s forecast that inflation would return close to two per cent sooner than previously expected.

The BOE noted that it would remain vigilant of downside risks that could require cutting rates below the historic low of 0.5 per cent or even to expand the QE program further.

Despite these concerns the BOE’s governor, Mark Carney, stressed the UK should be preparing for an interest rate increase rather than a cut.