Fears of deflation

Figures also showed that Britain's consumer price inflation (CPI) fell to 2.9 per cent in March, a one-year low, due to lower gas, housing and transport costs.

The consumer index, which provides the Bank of England's target measure of inflation, has dropped from a peak of 5.2 per cent last September.

However, it has not fallen as fast as the Bank of England anticipated in its last quarterly projections.

Andrew Sentance, a member of the rate-setting panel at the Bank of England, said: "The recent data suggests that the downward momentum of inflation in the short-term may not be as strong as we thought in February, probably because of the very marked depreciation in sterling since the summer of 2007."

But there are fears that falling rates of inflation could lead to deflation, which would see prices fall.

Howard Archer, an economist with IHS Global Insight, a financial forecasting company, said: "The ongoing relative stickiness of consumer price inflation suggests that it is unlikely to turn sharply negative later this year although a brief period of mild deflation is still possible.

"However, the year-on-year decline in retail prices will undoubtedly deepen significantly further as lower mortgage rates impact."

German optimism

Meanwhile, positive economic gains are being seen in Germany, where investor confidence has risen to its highest level in two years.

ZEW, a German economic research centre, said on Tuesday that its monthly index had risen to 13 points in April, from -3.5 points in March.

Wolfgang Franz, ZEW's president, said; "It is even becoming more likely that the economy will slowly recover in the second half of this year."