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. His comments caused the pound to plummet against a basket of currencies, falling 1.0% 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.
Mark Bolsom, Head of the UK Trading Desk at Travelex Global Business Payments says, âTodayâs Quarterly Inflation report has been a bit of a reality check. The preliminary reading of Q2âs GDP figure had put the markets in a good mood, as it looked like the economy was back on track.
âBut 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 weâre not in a position to withdraw stimulus or even tighten monetary policy.â
Bolsom comments, âKing was also very defensive about the Bankâs record of inflation, but they have overshot their inflation target for 42 out of the past 51 months. Januaryâs VAT rise is definitely not going to help either â and they have been forced to increase their inflation forecast.â