Investing.com - The pound rose to session highs against the dollar on Thursday after the Bank of England said inflation is likely to fall to zero in the first half of this year, but said there was no threat of deflation taking hold in the U.K.
In its quarterly inflation report, the BoE said "it is now more likely than not that CPI inflation will dip briefly below zero at some point in the first half of 2015,” and remain "close to zero" for most of the year.
However, BoE Governor Mark Carney said there was not threat of persistent deflation as the decline in inflation was due to falling petrol, food and energy prices.
Falling oil prices will be a net positive for the U.K. economy, Carney said, with take-home pay expected to grow at its fastest pace in a decade.
The bank expects inflation to rise above its 2% target in two year time and to rise fractionally above that in three years’ time if interest rates rise as markets expect.
GBP/USD was up 0.65% to 1.5334 from 1.5226 ahead of the inflation report.
In a change to its forward guidance, the bank said it would now consider cutting interest rates below 0.5% if inflation dips more deeply into negative territory than expected.
"The MPC stands ready to take whatever action is needed, as events unfold, to ensure inflation remains likely to return to target in a timely fashion, Carney said.
The bank also raised its growth forecast for this year to 2.9% from 2.6% previously and said it also expects growth of 2.9% in 2016.
Sterling was close to seven-year highs against the euro, with EUR/GBP down 0.61% to 0.7392 from 0.7447 earlier in the day.
The euro remained under pressure after talks on the Greek deb crisis on Wednesday ended without an agreement on extending the country’s bailout, though both sides said there was still hope for a deal. Further talks were due to be held on Monday.