The Bank of England left the door open on Wednesday for more monetary easing, cutting its forecast for UK economic growth and predicting that inflation would fall well below its 2% target in two years.
A day after the Federal Reserve downgraded its outlook for the United States, the BoE's quarterly Inflation Report — the first since a harsh government budget in June — showed it too is worried about the durability of the recovery.
"Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area," Bank of England Governor Mervyn King told a news conference.
Ten-year gilt yields slid to a 16-month low below 3.12% and sterling hit a one-week low below $1.57 as investors bet the BoE could restart its asset-buying, or quantitative easing, programme which pumped its 200 bln pounds ($314 bln) into the economy before being put on hold early this year.
The BoE said it stood ready to move policy in either direction and noted the outlook for inflation was "highly uncertain".
Most analysts expect the QE programme to remain on hold and rates to stay at their record low of 0.5% for many more months to come. But few are certain.
"It may take a more obvious slowdown in the economy to prompt the majority of MPC members to vote for a further bout of quantitative easing. But that may well materialise," said Jonathan Loynes at Capital Economics.
"And if nothing else, there is further support here for our long-held view that interest rates are going nowhere for a long time."
STUBBORN INFLATION
The BoE forecast CPI inflation would fall to around 1.4% in two years. But that was not before remaining well above the target all through next year, a big upward revision to the forecast it made in May.
King blamed this mostly on a rise in value-added tax due to come in at the start of next year but inflation — currently at 3.2% — has repeatedly surprised on the upside and has been above target for much of the last three years.
