Some say that “words have meaning and names have power”. Well when Mervyn King speaks, markets listen. And sell the pound too.
On Wednesday the Bank of England Quarterly Inflation Forecast was quite dovish in its inflation forecasts, despite forecasting an improving outlook for growth.
The Bank forecasts for consumer price inflation based on current market interest-rate expectations and no further quantitative easing showed inflation at about 1.6 per cent in two years, below its 2 per cent target; whilst seeing the level of output returning to pre-crisis levels by early 2011.
If true, this implies that UK interest rates would remain low for longer than the markets had previously thought (before the release of the report the markets were predicting rate rises of about 1.5 percentage points next year).
Thus the news sent yields on sterling interest rate futures and the currency lower.
Its a great example of how the financial markets are so liquid (at times!) and react to new information as it becomes available. But given the uncertainty in the economy at the moment, where central bankers and politicians comments are being scrutinised particularly stringently, I wouldn’t be surprised by a sudden change of direction.
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