UK Stock Market 9th August 2006

Category: Market News

Forex - Pound moves back up as BoE’s King sees 50 pct chance of 3 pct inflation

LONDON (AFX) - The pound moved higher, having initially fallen in the wake of what was perceived as a less hawkish Inflation Report, as BoE governor Mervyn King said there is a 50 pct chance of CPI inflation hitting 3 pct over the next six months.

King said in a press conference following the release of the Inflation Report that there is a good 50 pct chance of the CPI annual inflation rate hitting 3 pct over the next six months.

At 11.51 am, the pound was trading at 1.9100 against the dollar, up from 1.9059 before King’s comment and higher than the level of around 1.9088 usd that the pound was trading at before the Inflation Report was released.

The euro meanwhile, fell to 0.6749 stg from 0.6755 before King’s remark.

If the CPI inflation rate were to rise more than 1 pct above the Bank of England’s 2.0 pct target, King would have to write a letter of explanation to the Chancellor of the Exchequer, Gordon Brown, something no BoE governor has yet had to do.

King said, however, that the chances of having to write the letter over the next two years are well over 50 pct.

Earlier, the pound had fallen after the Inflation Report itself was seen as less hawkish than the market had expected.

‘The overall tone suggests that while the vote to hike may not have been as close a call as we had assumed, the MPC is not trying to signal that it will inevitably be followed by further tightening,’ said Daragh Maher at CALYON.

In the report, the BoE’s rate-setting Monetary Policy Committee predicted that CPI inflation will rise a little higher from the current 2.5 pct in the near term before easing back towards, but not to, the 2 pct target as the contributions of energy and import prices diminish…more