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Hard job for the Bank of England
On Wednesday sterling fell to a four-week low after the BoE inflation report showed the prospects for UK GDP growth are “unusually uncertain”.
According to BoE, the economy may grow by about 0.8% this year vs. previously expected 1.2%. The inflation is likely to stay above the 2% target at least in the next year. Weak growth and high inflation make the choice of monetary instruments difficult for the MPC.
The euro zone’s debt crisis threatens expansion despite the loose monetary policy is supporting the economy. The BoE governor Mervyn King said the euro area “is tearing itself apart without any obvious solution”. According to King, if the situation in Europe deteriorates, the bank will "react in many ways" (QE).
Morgan Stanley: “The increased magnitude of the euro crisis will likely hit the pound via economic second round effects. While the pound should still maintain its medium-term advantage against the euro, there is increasing evidence that the pound has topped against the US dollar.”
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