Inflation has hit a 15-year low of 0.5 per cent. The fall was almost all due...

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Inflation has hit a 15-year low of 0.5 per cent. The fall was almost all due to the fall in the world price of oil. Mark Camey, the Govemor of the Bank of England, predicted that inflation might fall even further as the oil price effect worked its way through the economy. Economic forecasters had predicted that the Bank of England would raise interest rates last year as economic growth recovered and demand-pull inflation rose. However, growth has not been particularly strong and inflation has fallen below the two per cent target for the Bank of England. As a result, economic forecasters are now predicting that the Bank-of England will only increase interest rates in 2016. 'Good deflation' gives the Bank of England more room to keep interest rates low to boost economic growth this year and next. Source: adapted from the Financial Times 14.1.2015, All Rights Reserved. (a) Explain the impact of a rise in the rate of interest on economic growth. (b) Why does inflation falling below two per cent mean that the Bank of England can delay increasing interest rates? Inflation has hit a 15-year low of 0.5 per cent. The fall was almost all due to the fall in the world price of oil. Mark Camey, the Govemor of the Bank of England, predicted that inflation might fall even further as the oil price effect worked its way through the economy. Economic forecasters had predicted that the Bank of England would raise interest rates last year as economic growth recovered and demand-pull inflation rose. However, growth has not been particularly strong and inflation has fallen below the two per cent target for the Bank of England. As a result, economic forecasters are now predicting that the Bank-of England will only increase interest rates in 2016. 'Good deflation' gives the Bank of England more room to keep interest rates low to boost economic growth this year and next. Source: adapted from the Financial Times 14.1.2015, All Rights Reserved. (a) Explain the impact of a rise in the rate of interest on economic growth. (b) Why does inflation falling below two per cent mean that the Bank of England can delay increasing interest rates?