The Bank of England released its quarterly inflation report today, in which it mentioned as expected, that it cut its growth forecast for 2012. The Bank said there were substantial downside risks to the economic recovery, the biggest of which came from the euro zone fiscal crisis.
Based on their predictions, the bank has decided to maintain a loose monetary policy as it expects inflation to fall further. Due to the current underlying global financial downturn, the British economy’s economic recovery will be affected and therefore cannot support a tighter monetary policy yet.
The BOE target inflation rate is 2 percent. Their forecast is for inflation to peak at its highest at 5 percent later this year but to subsequently fall steadily to 1.8 percent in two years time.
In a press conference, Bank of England Governor, Mervyn king said that “In the (monetary policy) committee’s view the weakness in underlying activity is likely to be somewhat more persistent than previously expected”, basing his comments on the fact that the mood in markets has taken a sharp turn for the worse since the last BOE meeting.
“There are a number of headwinds to world and domestic growth over the forecast period, not least the public and private debt overhang, and these headwinds are becoming stronger by the day” , he added.
Sterling dropped over 50 pips after the release of the report, falling to 1.6190 from 1.6246.