A Double Whammy for the BOE

BOE Governor Mervyn King rocked the markets yesterday with his very gloomy outlook for the British economy. As Pip Diddy mentioned in his economic roundup, the recently released BOE inflation report was to blame for the pound’s dive to its 10-week low against the Greenback. Check out the chart below to see what he’s talking about!

GBP/USD

In case you’re wondering why the BOE inflation report was such a big deal for the pound, remember that this quarterly paper contains the central bank officials’ economic assessment and outlook for the next two years. This is typically used by members of the monetary policy committee to decide on whether they need to implement further stimulus or not.

This particular report came at a crucial time for the U.K. as the BOE just unveiled a massive quantitative easing plan on top of their low interest rates program. Based on the economic figures in the report, it seems that the central bank’s accommodative monetary policy stance still isn’t enough to keep their economy afloat. So how did it go?

It didn’t take a mind-reader to know that BOE Governor Mervyn King was not in a good mood. He had a lot to say, but unfortunately, they were all bad news for the U.K. economy.

For one, the BOE head honcho warned that the U.K. could be in for a triple-dip recession. After coming out of a 9-month recession in Q2 2012 when the economy grew by 1.0%, he said that growth could once again contract in the last quarter of the year as the effects of the Olympics would probably be reversed.

Looking into the foreseeable future, growth will most probably be subdued and be below where it was before the 2008 recession. Yikes!

Analysts are convinced that the disappointing labor data forced the central bank to finally face the music and cut its growth forecasts. Statistics for October showed that jobless claims rose at the fastest pace since September last year, increasing by 10,000 to 1.58 million during the month.

Painting an even bleaker picture for the U.K. economy is inflation. The CPI for October printed further away from the BOE’s 2% target at 2.7%, 0.1% higher than where it was in September. Policymakers think that we’ll continue seeing the inflation report print above the target next year.

With the U.K. having to deal with slowing growth amid higher inflation, it would seem that the BOE is stuck between a rock and a hard place. How will it deal with them?

King made it clear that the central bank won’t hesitate implementing more easing measures to stimulate the economy. He put an end to rumors that the bank was losing confidence in the effectiveness of quantitative easing (QE) which broke out after it decided not to increase its asset purchases during the last rate statement. The head honcho clarified that the only reason they didn’t choose to do so was because of the recent uptick in inflation.

Although most market junkies don’t think that the BOE would ease monetary policy in December, it seems that BOE Governor Mervyn King has convinced everyone that the central bank wouldn’t hold back in stimulating the economy should the need arise despite higher inflation.

After all, King and his crew aren’t unfamiliar with the situation. In 2011, the BOE implemented quantitative easing while inflation was at 5%. Why should this time be any different?