British Pound Tumbles as Core CPI Hits 2 Year Low, BOE’s King Forecasts "Marked" Contraction in 2009

The UK consumer price index contracted for the third straight month in December at a rate of 0.4 percent, helping to drag the annual rate down to 3.1 percent from 4.1 percent. The index’s decline was far less than expected, as the annual rate was actually forecasted to plunge to 2.6 percent, and the actual rate leaves inflation well above the BOE’s 2 percent inflation target and just above their 3 percent ceiling. However, the core measure of CPI, which excludes volatile food, energy, alcohol, and tobacco costs, plunged to a more than 2-year low of 1.1 percent from 2.2 percent, suggesting that broad price pressures are indeed cooling. This leaves the odds in favor of further reductions to the UK’s Bank Rate, especially as BOE Governor Mervyn King said in a speech this afternoon that the contraction of GDP during the first half of 2009 may be “marked” and there was is still potential for inflation to fall below 2 percent. Mr. King also left the door open to the use of “unconventional” measures, and that in coming weeks, the BOE may purchase securities such as corporate bonds and commercial paper in an effort to boost liquidity and lending to companies and consumers.