Bank of England Inflation report offers markets a reality check

August 11, 2010

-Mark Bolsom is Head of the UK Trading Desk at Travelex Global Business Payments. The opinions expressed are his own.-

Sterling tumbled to a one week low against the dollar in trading this morning, after the Bank of England delivered its latest quarterly inflation and growth forecasts today.

In his speech, Bank of England Governor Mervyn King downgraded his economic growth forecasts and raised inflation expectations, saying he expected inflation would fall well below its 2 per cent target in two years, even if interest rates stay low.

While markets had expected growth forecasts to be lowered, the Quarterly Inflation Report has been a bit of a reality check. The preliminary reading of Quarter 2’s GDP figure had put the markets in a good mood, as it looked like the economy was back on track.

But King was unequivocal in his belief today that the bias of policy was leaning towards additional quantitative easing, rather than monetary tightening.

This confirms the view that the economy is not out of the woods yet, and we’re not in a position to withdraw stimulus or even tighten monetary policy.

King was also very defensive about the Bank’s record of inflation, but they have overshot their inflation target for 42 out of the past 51 months. January’s VAT rise is definitely not going to help either – and they have been forced to increase their inflation forecast.

King’s comments caused the pound to plummet against a basket of currencies, falling 1.0 percent against the dollar to $1.5683, its weakest since 30th July. It also fell against the euro to 83.05 pence from 82.87 pence before the report.

What did you think of the inflation report? Post your comments at www.twitter.com/fxpayments

Picture Credit: File picture of British sterling money in coins and bank notes. REUTERS/Catherine Benson

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