The Governor is required to write to the Chancellor if CPI inflation moves more than one percentage point above or below its 2% target.
Carney stated that inflation is likely to remain close to its current rate over the next few months, with a negative outturn likely at some point over that period.
In March, twelve-month CPI inflation stood at 0.0%. As in February, this remains the lowest figure since the official CPI data began and two percentage points below the inflation target.
Carney said that the "most important single reason for below-target annual inflation is the sharp drop in energy prices during the second half of last year".
However, he remains adamant that inflation rates close to zero are unlikely to endure for very long, stating that CPI inflation should pick up notably once earlier declines in commodity prices start to drop out of the annua! comparison, towards the end of this year.
He noted that a "temporary period of failing prices, driven by large one-off adjustments in a few specific components of the CPI" shouid not be mistaken for the potentially damaging process of 'deflation'.
Carney added:
"The economy is growing, unemployment is falling and earnings growth has improved since the middle of last year. Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households real take-home pay. In 2015 real disposable income is expected to rise more strongly than in any year since 2007."
He stood by his aim to return inflation to the 2% target within two years.
In its Inflation Report today, the MPC judged it likely that, conditional on interest rates following the path currently implied by market yields, slack in the economy will be absorbed and inflation will return to the 2% target within two years.
However uncertainties around these judgements and risks remain. The MPC admitted that the fall in near-term inflation couid be more persistent than the Committee currently expects, stating that "if low inflation were to depress inflation expectations, it could become self-reinforcing."
Were these downside risks to materialise, the MPC said that it could also decide to expand the Asset Purchase Facility or to cut Bank Rate further towards zero from its current level of 0.5%.
In his reply, George Osborne said:
"Today I want to re-affirm that the Government’s commitment to the current regime of flexible inflation targeting, with an operational target of 2% CPI inflation, remains absolute.
"The target is symmetric: deviations below the target are treated the same way as deviations above the target. Symmetric targets help to ensure that inflation expectations remain anchored and that monetary policy can play its role fully.
"I therefore welcome that the MPC remains vigilant to both upside and downside risks to its forecast and stands ready to act if these risks materialise, to ensure inflation remains likely to return to target in a timely fashion."
