16
Mar
Bank action 'can stem deflation'
Deflation in the UK will be 'short-lived' if decisive action is
taken, according to the Bank of England.
Economists expect prices to start declining soon as recession
hits business and consumer spending.
Using 'more unconventional' monetary policy methods should
prevent deflation from taking hold, the Bank said.
After cutting interest rates to a record low of 0.5%, the Bank
is exploring alternative ways of boosting economic growth.
It is now in process of injecting £75bn of new money into
the ailing economy in the hopes of stimulating economic growth.
'Short-lived'
'If policy responds sufficiently promptly and decisively
employing the full range of conventional and unconventional
monetary policy instruments, deflationary episodes should be
short-lived,' the Bank said.
It was examining the potential consequences of deflation in its
quarterly bulletin.
One of the concerns of deflation is the increased debt burden.
Real mortgage rates effectively increase as prices fall.
There is also concern that deflation magnifies unemployment
because employers that don't cut wages due to worker opposition
won't hire more staff.
'But very recent evidence tends to suggest that money wages are
flexible downwards to some extent in the UK in the face of the
current downturn,' the Bank said.
REPORT FROM bbc.co.uk/news Monday 16th March 2009