The Bank of England comments on the economy and the potential for quantitative measures to boost the money supply will remain negative for Sterling, but selling should be contained from current levels

In its quarterly inflation report, the Bank of England stated that inflation was likely to fall substantially below the 2.0% target in the medium term, potentially with a level of around 0.50% in two years time. Bank Governor King also warned that the UK was experiencing a deep recession as forecasts were downgraded.

The report stated that there was little scope for further stimulus through interest rate cuts and the focus will tend to be on the possibility of quantitative easing. King stated that this would remain under discussion and that there could be a decision to implement such a policy at the March MPC meeting.

The downbeat comments, allied with increased speculation over the quantitative easing, will be a negative factor for Sterling. After a brief respite following the employment data, Sterling weakened to lows near 1.43 against the dollar before a slight recovery. It lost ground in Europe with a dip to below 1.42 and was weaker than 0.90 against the Euro on Thursday.