Sterling fell to a session low against the dollar and gilt futures pared losses on Wednesday as the Bank of England slashed inflation and growth forecasts, and left the door open for more stimulus.
GBPUSD fell some 30 pips to 1.5743 from 1.5772 immediately after the news before recovering.
The Bank of England released its quarterly Inflation Report painting a gloomy picture for the UK economic outlook . The British economy has been sluggish and contracting due to the euro zone crisis. UK inflation is expected to fall below target and thus the BoE may need to step in to further expand its quantitative easing program to provide more stimulus to boost growth.
The BoE indicated it may have to add to its 275 billion pound asset purchase programme, as it predicted inflation would fall to 1.3 percent in two years time. It expects inflation to fall below its 2 percent target by the end of 2012.
Some speculate the bank will add another 50 billion pounds of stimulus in February. This will result with more supply of pounds in the system which results in weakening the value of the currency.
The BoE also sharply revised down its near-term growth forecasts, and now sees a strong chance that annual growth rates will be below 1 percent throughout 2012.
“The prospects for the UK economy have worsened,” the Bank said.
It added that slowing global demand, concerns about the solvency of several euro area governments, increasing strains in banking and some sovereign funding markets would weigh heavily on UK growth in the near term. Output was likely to be broadly flat in the final quarter of this year.