13th February 2015
The pound soared against the dollar and the euro overnight following yesterday’s announcement from the Bank of England that the UK is heading for deflation.
Sterling rose above $1.54 and €1.35 overnight following the news from Bank of England governor Mark Carney.
Carney said that the it is ‘more likely than not’ that inflation will fall into negative territory from its current low of 0.5%. Low inflation has been caused by downward pressure on food prices as supermarkets slug it out in a price war and the tumbling cost of oil that has seen prices at the pumps drop and energy companies pass on savings, although some have argued the energy price drops are less than they should be.
While the UK is heading for deflation, when inflation falls into negative territory, Carney said it ‘masks stronger underlying dynamics’.
The Bank said the economy grew 3.1% in 2014, which was above the 2.6% rise reported by the Office of National Statistics and the best performance since 2003.
The ONS is now pencilling in growth of 2.9% for 2015 and increased its forecasts for 2016 from 2.6% to 2.9%.
There was also good news for households as incomes after tax are expected to grow 3.5% this year, the best growth since 2001.
‘The combination of rising wages and falling energy and food prices will help household finances and boost the growth of real take home pay this year. This will support solid growth in consumer spending,’ said Carney.