Deflation 'short-lived' says Bank

The comments in the Bank's latest quarterly bulletin come as the Retail Prices Index (RPI) is expected to turn negative in coming months as mortgage payments fall - signalling the first instance of falling prices in almost 50 years.

A prolonged bout of deflation is seen a threat because falling prices magnify the burden of debts such as mortgages in real terms.

Firms may also face resistance to cutting wages to reflect lower prices due to opposition from workers, which could lead to higher unemployment.

But alongside cutting interest rates to an all-time low of 0.5%, the Bank is now creating £75 billion to pump into the economy under unconventional quantitative easing tactics - effectively printing money.

It hopes the bold move will help lift its official benchmark of inflation Consumer Prices Index (CPI) - itself set to fall close to zero this year - back to its long-term target of 2%.

The Bank stressed the importance of distinguishing the impact of deflation from the economic shock which caused it, but said it would learn the lessons of previous deflation episodes.

These had been made more painful by "inappropriate policy responses, or by constraints imposed by existing policy regimes", it added.

"But if policy responds sufficiently promptly and decisively employing the full range of conventional and unconventional monetary policy instruments, deflationary episodes should be short-lived," it said.