The Bank of England is set to slash its inflation forecast to near zero when it publishes an updated outlook for the UK economy. As Ciara Lee reports it raises the prospect of the Bank of England's first ever deflation report.
Deflation is close - but don't worry. That was the message from Bank of England governor Mark Carney, as he explained why UK inflation is at its lowest level in nearly 15 years. (SOUNDBITE) (English) BANK OF ENGLAND CHIEF MARK CARNEY, SAYING: "The MPC estimates that two thirds of the gap between the current inflation rate and target, is explained by the sharp falls in food and energy prices, and this is generally good news for British households. The MPC's job is to provide clarity over the horizon over which it is aiming to bring inflation back to target and take the necessary steps to do so." Those steps could involve a rate cut and QE. A halving in global oil prices and a strong pound has pushed down UK inflation to 0.5 percent, way below the Bank's 2 percent target. But Carney says it's unlikely to lead to a deflationary spiral like that feared in the euro zone. NAB's Nick Parsons says markets aren't convinced. (SOUNDBITE) (English) NICK PARSONS, MARKET STRATEGIST AT NATIONAL AUSTRALIA BANK, SAYING: "It's all very well for him to have the same definition as Mr Draghi does, but it still begs the question why did Mr Draghi throw a trillion euros at it when Mr Carney appears so relaxed." Cheaper fuel has put more money in the pockets of consumers and factories had a strong January as their costs fell. Some economists predict this year Britain will see its fastest growth in nearly a decade. That's good news for Prime Minister David Cameron facing an election in May, and in full campaign mode. ACTUALYITY - CAMERON SAYING: "I am at top speed" (English) But Cameron might not want to celebrate too soon - he's in the midst of a political storm, surrounding an HSBC tax avasion row. A number of Conservative party donors held accounts with the bank in Switzerland, where the tax dodging allegedly took place The opposition has been quick to jump on the issue. SOUNDBITE (English) ED MILIBAND, LABOUR LEADER, SAYING: "He's a dodgy Prime Minister, surrounded by dodgy donors." But Labour donors have been named too - making it hard for some chose between them. (SOUNDBITE) (English) NICK PARSONS, SAYING: "For the first time in a generation politics matters. It hasn't mattered for the last 25 years. Both major parties have essentially offered the same programme to the electorate." There's still no runaway leader yet in the elelction campaign. And any sign that the economy is going off track could be a key factor.