U.K. BOE Inflation Expectations Drop Most Since 1999

By Svenja O’Donnell

Dec. 11 (Bloomberg) -- U.K. consumers’ predictions for inflation in the next year recorded the biggest drop since at least 1999 in November as the recession intensified, a survey for the Bank of England showed.

The median forecast on increases in consumer prices for the coming 12 months fell to 2.8 percent, compared with 4.4 percent in August, the central bank said today in London. That’s the biggest drop since the quarterly survey began nine years ago. GfK NOP surveyed 2,065 people from Nov. 13 to Nov 18.

The Bank of England must avert the risk of deflation as the economy sinks into a recession that may be as long and deep as those since the mid-1970s, policy maker Andrew Sentance said this week. The central bank has cut the benchmark interest rate to the lowest since 1951, on concern it will miss the 2 percent target for inflation.

“Sharply retreating inflation expectations gives the Bank of England further scope to enact another sharp interest rate cut in January,” said Howard Archer, chief European economist Global Insight in London. “Consumer price inflation will continue to plummet over the coming months.”

Archer predicts the Bank of England will cut the interest rate by at least 0.75 percentage points in January.

Consumers, when asked what the current rate of inflation was, said 4.9 percent, compared with 5.4 percent in August, the biggest drop since the survey began.

Deflation Risk

The U.K. inflation rate fell the most in at least 11 years in October to 4.5 percent. The Bank of England predicts that it will undershoot the target next year and Governor Mervyn King has refused to rule out the risk of deflation.

Britain’s economic prospects are worsening as it slips into its first recession since 1991. The economy contracted 0.5 percent in the third quarter, and the Bank of England predicts it will shrink next year. U.K. policy makers cut the key rate by a percentage point to 2 percent on Dec. 4, following a 1.5 percentage-point reduction the previous month.

“Inflation expectations are coming down and will come down further next quarter,” said Alan Clarke, an economist at BNP Paribas SA in London. “Interest rates have further to fall, and there’s a high probability that they will go to zero.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.