Inflation rose to 5.2% in September, under severe upward pressure from fast-rising food and fuel prices.
But the British economy is now teetering on the brink of a recession, and the Bank of England expects that lower consumer and business spending resulting from the broader economic slowdown will cause prices to stop rising – leading to sharply falling levels of inflation.
“Inflation will fall below targets,” Bank of England governor Mervyn King told journalists at a press conference, “but we aim to get back there in the medium term.”
The biggest weapon in the Bank of England’s arsenal to control inflation is the base interest rate. Cutting interest rates tends to increase inflation by stimulating spending, and lower it to boost growth.
The Bank of England slashed its benchmark interest rate earlier this month by 1.5 percentage points in an attempt to shore up the economy as it sinks into recession, a bold cut that far exceeded economists’ expectations.
The cut to a 3% base rate left rates at levels last seen in the 1950s.
Economists are viewing Wednesday’s report as evidence that further interest rate cuts are likely to follow soon.
“The report reveals that if interest rates were held at 3.0%, inflation would likely fall close to 0% in 2010,” said Richard Snook, senior economist at the Center for Economics and Business Research. “This implies that further interest rate cuts, probably to 1% by the end of 2009, are certain.”