Fears that Britain could sink into a damaging “deflationary spiral” have stayed the hands of Bank of England policymakers who had pushed for an early interest rate rise, monetary policy committee member Martin Weale has revealed.
Weale was one of two MPC members who had consistently voted for higher borrowing costs from August last year, as the economy recovered. But after falling oil prices drove inflation down to 0.5% in January, Weale and his fellow anti-inflation “hawk”, Ian McCafferty, backed down and agreed that rates should remain at their record low of 0.5%.
In an article for the Observer, Weale, an independent member of the MPC, which meets each month to set interest rates for borrowers across the UK, explains publicly for the first time what made him change his mind.
Falling oil prices have so far been a boon for consumers, Weale says. But if everyone starts to assume that prices will continue declining, deflation can take hold.
“If very low expectations of inflation were to become entrenched there would be a risk that the economy would sink into a deflationary spiral. Wages and prices could fall, people might put off spending if they thought things would be cheaper in the future, and they would find that, even though interest rates were very low, their mortgages became a burden which was difficult to manage,” he writes.
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