Business

Bank of England warns inflation could drop below 1%

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Media captionMark Carney: "MPC predicts annual pay growth of 2% by the end of 2015"

The Bank of England has warned that inflation could fall below 1% in the next six months, owing to lower food, energy and import prices, as well as feeble growth in Europe and elsewhere.

Governor Mark Carney said he did not expect inflation to reach the targeted rate of 2% for three years.

The Bank also cut its prediction for UK economic growth in 2015 to 2.9%.

However, the Bank said it expected average salaries to be growing by 2% by the end of 2015.

Earlier, official figures showed average wages excluding bonuses grew by 1.3%, which was just above the latest rate of Consumer Prices Index inflation and the first time it has risen above that measure in five years.

The Office for National Statistics figures also showed that unemployment in the UK fell by 115,000 in the three months to the end of September, to a total of 1.96 million.

'Encouraging signs'

The governor said the UK was witnessing "the start of real pay growth".

"We are seeing encouraging signs with respect of pay... we expect this pick-up to accelerate," he told reporters.

However, the governor had more sombre news on the rate of inflation, which the Bank wants to see reach 2%.

In a news conference at the Bank of England, Mr Carney said it was likely he would soon have to write a letter to the Chancellor, George Osborne, explaining why inflation had dropped below 1%.

But he added that inflation was expected to recover in the long term, and that the Bank would continue to keep its interest rate at 0.5% for some time.

The governor also sounded a warning on the state of Europe's economy.

"A spectre is now haunting Europe," he said, "the spectre of economic stagnation, with growth disappointing again and confidence falling back."

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