Bank of England Deputy Governor talks 'good deflation' in Business School speech

The UK is in a state of 'good deflation,' according to a speech at the Business School by the Bank of England Deputy Governor for Monetary Policy.

Dr Ben Broadbent presented on 'The Economics of Deflation' at an event at Imperial College Business School today, attended by members of the media, staff, students and external guests.

Dr Broadbent said there was only a low chance of a broad and protracted deflation that would affect wages.

He discussed in depth when deflation can be a problem for the economy, but suggested that now is not one of those times.  He said we are currently in a state of what has been termed ‘good deflation’ where the drop in inflation has been driven largely by a decline in commodity prices, which has boosted real incomes.

“This is likely to be temporary,” said Dr Broadbent, adding that “There is a risk that the fall in prices becomes more generalised and more sustained. If so … what matters is not deflation per se but the capacity of monetary policy to respond to it.”

He said that the Monetary Policy Committee must be watchful for signs that ‘good’ deflation is turning into something worse. However, in his view, “the likelihood of a broad and protracted deflation, afflicting wages as well as prices, is pretty low.”

Referencing Consumer Price Index data for over 70 countries dating back decades, Dr Broadbent cautioned against taking the current situation out of context, explaining that “history tells us these episodes are rare…in the case of developed countries with floating exchange rates, almost to the point of uniqueness.”

The Bank of England chose Imperial College Business School to host today’s speech, which is one of the institution’s last ahead of the lead-up to the general election in May.

Jonathan Haskel, Professor of Economics at Imperial College Business School, who formally introduced Dr Broadbent at today’s event, said:  “One of our key aims at the Business School is to benefit business and society, and understanding and responding to the wider economic picture is a big part of that. We were delighted that the Bank of England chose us to host this event and to have the opportunity to hear what Ben Broadbent had to say about monetary policy first-hand.”

The full speech can be found on the Bank of England's website.