Bank of England predicts deflation in 2009

In his letter to Chancellor Alistair Darling, Bank of England Governor Mervyn King warned that Britain’s economy faces deflation in 2009.

Mr King said that overall inflation is likely to return to its 2% target in the first half of 2009, after which it will move “materially” below 2% later in the year.

He also said that more help might be needed to encourage more lending, writing: “Additional measures, building on the government’s package to support the banking system announced in October, will probably be required to underpin lending to households and companies.”

A spokesperson for debt management company Gregory Pennington said: “While the lower prices associated with deflation could put some people in a better position to repay their debts, the implications for the wider economy are less positive. Deflation means that less money flows through the economy, which could result in rises in unemployment and a worsening recession.

“The predictions for the future highlight the need for people to tackle their debts as soon as possible. Any debts could become a much bigger burden next year if the economic situation does deteriorate further.”

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