Release Explanation: The Bank of England (BOE) Inflation Report provides detailed economic analysis and an assessment of inflation over the next two years. The report is released quarterly and holds critical insights into the bank's view of inflation and the economic conditions that will affect interest rates in the future. Currency traders scrutinize this report as it's been known to provide clues about the bank's future monetary policy.
Trade Desk Thoughts: According to the latest Inflation Report, there has been a strong deterioration in the outlook for domestic and global economies. This had a strong affect on domestic demand in the United Kingdom.
According to the bank's own projections, the GDP will fall from an average of 4-6% in first part of 2009, but then resume its growth path in the second half the year. The Bank of England sees the U.K. GDP above the 0% mark only at the beginning of 2010, a substantial downgrade from the November report. Private forecasts expect the U.K. economy to contract by 2.0-2.5% in 2009.
In the bank's view, the economic slowdown will reduce the CPI rate well below the 2% target. The outlook for inflation had been affected by the huge declines seen in the energy market, a weaker pound and by the temporary reduction in VAT.
The Bank of England had forecast that inflation would fall in the medium term substantially below the 2% target, and remain at such low level beyond 2010. However, the BoE said that the CPI read is likely to remain very volatile in the coming period, something also outlined in the interest rate meeting reports.
The Inflation Report also outlines that, market participants expected the Bank Rate to trough at around ¾% in mid-2009, substantially lower than envisioned at the time of the previous Report.
Forex Technical Reaction: The pound tumbled 125 pips as soon as the Inflation Report was made public. So far, today, the pound has lost 160 pips against the dollar, declining 500 pips in the last two days. Against the euro, the pound fell 100 pips today.