In its latest quarterly inflation report, the Bank of England forecast that the 2.0% inflation target would be met on the assumption that interest rates are cut at least one in 2008 while report was also based on the assumption that there would be a first-quarter interest rate cut.

The central bank also stated that the 2008 slowdown in growth was likely to be sharper than expected.

Bank Governor King attempted to temper the statement slightly by stating that a slowdown in the housing sector might not have a negative impact on consumer spending, but he also stated that the there was a bigger risk of a downturn in the short term while the outlook was less benign.

In reaction, there has been a rally in gilt markets as markets price in an earlier than expected cut in interest rates. The UK currency has also weakened to beyond the 0.71 level against the Euro for the first time since December 2004 and sentiment will remain weaker in the short term.