The Bank of England (BOE) inflation report will be released on Wednesday, November 12th at 10:30 GMT. The inflation report includes detailed economic forecasts and inflation projections which the BOE policy board uses to determine monetary policy. At the October policy meeting the BOE elected to maintain overnight rates at 0.5% and to expand its asset purchase program by £25bln to £200bln.The BOE also said recent economic data on spending and confidence suggest that the economy is likely to soon show improvement. The GBP has held up remarkably well in light of last Thursday's decision by BOE to expand its asset purchase plan. One explanation for the GBP price action is speculation that the BOE may be getting closer to the end of its expansion of asset purchases as recent UK economic data including housing, consumer sentiment and retail sales point to the beginning of recovery for the UK economy. Tuesday, the UK reported that October BRC retail sales rose at the fastest pace in seven years and the RIC's October house price balance rose to a three-year high. UK trade gap widened to an eight-month high in September reflecting a surge in auto imports. The surge in auto imports suggests improving domestic demand in the UK. GBP traded at a three month high versus the USD Monday supported by improving risk sentiment as global equity markets surge and by speculation that the BOE is nearing the end of its expansion of quantitative ease. The trade will be looking to Wednesday's inflation report for clues to whether the BOE is nearing the end of the expansion of its asset purchase plan.
The BOE noted in the October policy statement that the global economy is showing signs of recovery, in particular emerging market economies, that asset prices have continued to rise and financial conditions have improved. In the August inflation report the BOE said that inflation could drop below 1% and over the next few years fall short of the BOE's 2% target rate. UK inflation dropped to its lowest level in five years during September. The decline in inflation reflects the impact of the UK and global recession. The October policy statement however appeared to indicate that the BOE may upgrade its growth and inflation forecast and soon plan to slow down its asset purchase plan. One key factor will be how the BOE views the report of an unexpected decline in UK Q3 GDP. UK Q3 GDP contracted by 0.4%. The Q3 GDP report indicates that the UK economy has yet to emerge from recession. The report may encourage the BOE to reduce its GDP forecast and continue to expand its asset purchases. A number of analysts however expect the BOE to discount the Q3 GDP and forecast improved outlook for economic growth into 2010 and that inflation will return to 2% target into 2011. This would be a marked contrast to the August inflation report and a strong signal that the BOE will soon pause its asset purchase program. A pause in the BOE asset purchase program would be a short-term positive for the GBP. The trade will focus on BOE Governor King's press conference after the inflation report is released for his views on the UK economy and whether the BOE should continue the asset purchase plan. We expect King to upgrade UK inflation and growth outlook and lay the foundation for a pause in the BOE asset purchase plan. The risk to this outlook is there remains a lot of slack in UK economy and uncertainty about strength of the recovery reflected by the contraction of Q3 GDP.