LONDON (Alliance News) - Bank of England Governor Mark Carney Tuesday told the BBC that the central bank still expects interest rates to "move up over the course of the next couple of years", even though the central bank expects inflation to fall further which could mean rates are kept lower for longer than it had previously expected.
In an interview with BBC economics editor Robert Peston, Carney said the bank expects that inflation as measured by the Consumer Price Index will continue to fall as petrol prices are cut to catch up with the tumbling oil price.
The governor said conditions in the eurozone were more deflationary than in the UK, although it was not impossible that the drop in energy and food prices could move into other sectors and make deflation a bigger danger in the UK.
The central bank has the tools to deal with the deflationary risk, he said, saying that would involve keeping interest rates at record lows for a bit longer rather than returning to quantitative easing.
"It will be an environment, most likely, that interest rates start to increase and move up over the course of the next couple of years," he said in the interview according to the BBC.
The Bank of England confirmed Tuesday that Carney would write a letter to UK Chancellor of the Exchequer George Osborne after the drop in inflation, which it will publish alongside its inflation report in February.
Carney's comments came after the oil price decline caused the UK's inflation rate to drop to just 0.5% in December, its lowest level since May 2000. Inflation as measured by the Consumer Prices Index halved to 0.5% in December, from 1% in November. That was a bigger fall than the drop to 0.7% that economists had predicted.
The Brent crude oil price touched a near six-year low of USD45.16 Tuesday, down more than 60% from its summer high of USD115.
By Steve McGrath; stevemcgrath@alliancenews.com; @stevemcgrath1
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