Sterling dented by May Quarterly Inflation Report
13th May 2009
The Pound retreated from a four-month high against the Dollar and eased against the Euro on Wednesday after the Bank of England downgraded its latest projections for UK growth and inflation. In its May Quarterly Inflation Report, the Central Bank said that it expected a “slow” economic recovery and for inflation to remain below target for the next three years as the country struggles to escape its worst recession since the 1980’s.
On growth, gross domestic product was estimated to have fallen by 1.9%q/q in the first quarter of this year, a larger decline than initially anticipated at the time of the February report. However, the Central Bank noted there were signs from recent economic surveys that the rate at which output was contracting had begun to moderate. GDP is seen troughing with an annual fall of 4.5% at the end of the first quarter, with growth then resuming into 2010 before reaching a growth rate of approximately 2.5% in 2011. The projections were considerably flatter than the previous quarterly forecasts and suggest that UK interest rates will remain subdued in the coming months.
The Bank of England also expects UK inflation to bottom out around 0.5% by the end of this year before picking up to 1.2% in two years time. The Report cited key downside contributions from food and energy prices, as well as a growing margin of spare capacity acting to depress wages and price increases.
Speaking in London, BoE Governor Mervyn King remained comfortable with the recent depreciation in Sterling, which he said provided one of the reasons to believe economic activity will rebound in the short term, along with “unprecedented policy stimulus”. However, he was less optimistic than the financial markets have been in recent weeks with regards to improving UK economic data. “Even if there is a recovery in the next 6-9 months, it is unclear how sustainable this will be” he said.