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The Bank of England continued with a dovish tone in their latest inflation report with sterling losing ground as a result.

After an initial blip higher sterling faded throughout the speech and the session afterwards as Mervyn King outlined the look of the inflation and growth curves over the next 2 years.

Growth, GDP, is being predicted at a rate of 2% for 2010 and 4% for 2011 while inflation may peak above the 2% target level shortly before falling back. King’s exact words were ‘we expect the rate of inflation to spend more time below target than above it’.

The growth figures are optimistic. They forecast a V shaped recovery for the UK economy and are higher than 90% of City economists have predicted. My estimates of a 1.5% growth figure in the 2010 and 2.8% in 2011 are less bullish than the Governor’s. It will be interesting to see what Alistair Darling predicts in his Pre-Budget Report on Dec 5^th.

The inflation figure was the big worry for GBP however. Naturally, strong inflation leads to curbing of that inflation via interest rate increases and subsequently GBP becomes more attractive to the outside world as an investment. If inflation is due to ‘spend more time below target than above it’ then the scope for rate increases are severely limited.

By the end of the day GBP had fallen over 1 cent against the EUR and 2 cents against the USD. The unemployment releases for the UK were a lot better than expected but had little impact on the pound.

Data is limited today and we may see sterling recover today as many commentators believe the sterling selling yesterday was overdone.

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