BoE Quarterly Inflation Report weighs on Sterling
14 May 2008
Sterling fell to a 3-month low against the Dollar on Wednesday after the Bank of England’s Quarterly Inflation Report forecast heightened inflationary risks and further deterioration in UK economic growth.
The report highlighted that the Bank’s outlook for consumer price inflation had deteriorated somewhat since its last report in February, reflecting higher energy and food prices in particular. There were also signs of concern regarding price inflation of imported goods, given the depreciation of Sterling in recent months. Assuming the Bank cuts interest rates according to current market yields, projections indicate that inflation will remain above the Bank’s 2.0% target for the next 2 years. Furthermore, BoE governor Mervyn King said that inflation could reach as high as 4% in the second half of 2008 and remain above 3.0% for a number of months, “a level requiring a number of explanatory open letters to the Chancellor”.
Meanwhile, the Bank pointed to further moderation in UK economic growth, projecting a marked slowdown, assuming the Bank Rate follows a path implied by market yields. Forecasts for GDP growth have been revised down sharply, implying expansion at around 1.0% at the end of the year before recovering into 2009. The outlook was somewhat weaker that the February report, highlighting sluggish real income growth and tighter credit conditions, coupled with dampened domestic demand and falling property prices weighing on growth.