16 May – Sterling bashed by BoE Quarterly Inflation Report

Sterling fell sharply following the BoE quarterly inflation report, falling nearly 65 pips to $1.59087 at 10.30am (London time) after the central bank lowered its growth expectations for this year and raised near-term inflation expectations.

Key points from BoE report:

The Bank of England (BoE) slashed its growth forecast for this year to 0.8% from 1.2%, saying ‘underlying growth is likely to remain subdued in the near term before a gentle increase in households' real incomes and consumption helps the recovery to gain traction’. The bank's governor Sir Mervyn King warned that the eurozone posed the greatest threat to the UK recovery.

The central bank explained that stimulus from monetary policy is likely to support economic activity, but warned that strains within the euro, tight credit conditions and fiscal consolidation are all likely to temper the pace of any expansion.

The BoE also said that the reduction in the fiscal deficit as a proportion of nominal GDP is likely to be a little slower in 2012/13 than in the previous two years.

According to the BoE, the rate of inflation will not fall as quickly as previously thought, and will remain above the Government's 2% target ‘for the next year or so’. This is higher than expected three months ago.

The central bank also explained that the ‘upward revision reflects both the impact of higher energy prices and indirect taxes, and also a judgement that cost pressures from past rises in commodity prices and weak productivity are likely to have a greater impact on inflation in the near term than expected three months ago’.

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