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BoE Mervyn King Expects Inflation Below 1% in 2009, Fueling Bets For Additional Rate Cuts (Update)

Tuesday, 16 December 2008 10:28:54 GMT  |  Geng Chen, DailyFX Research

Bank of England Governor Mervyn King sees risk that below-target inflation will persist for a while. In his letter to the Chancellor, explaining why CPI continues to deviate more than 1% from the inflation target, King said that it is likely that he will have to write a letter of explanation next year of why inflation is more than 1% below the 2% target. When comparing the current economic situation to the November Inflation Report, the Governor noted that that the immediate outlook for for economic activity has worsened, which will push down CPI further. However, the Sterling depreciation, interest rate cuts since November will support activity, as will fiscal stimulus measures. In all, today's comments further supports the outlook for further sharp BoE rate cuts near-term.
The annual rate of inflation in U.K. fell to the lowest since June despite it came in stronger than expected. Headline reading only slipped to 4.1% from 4.5% in October, against a market expectation for a drop to 3.9%. In addition, the core measure of inflation edged up to 2.0% year-over-year from 1.9% in month prior, highlighting that some stickiness is still apparent in the market despite the rapid cool down of the economy. However, retail prices came in weaker than expectation, with RPI decelerating to 3.0% from 4.2%. The increasingly dire outlook for the domestic and global economy will further dampen inflation growth. Market participants have raised bets that the Bank of England will have to deliver further aggressive rate cuts to meet the 2% target for inflation.

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