Sterling gains after Quarterly Inflation Report

The Bank of England's updated inflation and growth forecasts for the UK economy suggests that inflation is likely to remain above target during 2011, but will eventually fall back towards 2%.

The report released this morning outlined that the timing and scale of decline remains "highly uncertain" and "the chances of inflation being either above or below the target" at the end of the two-year forecast period are "roughly equal".

The Bank's Governor, Mervyn King, said the risks to the economy were "on the downside" and growth was likely to slow from its current pace, though, "the Committee's best collective judgement is that GDP growth is a little more likely to be above its historical average than below it for much of the forecast period".

Andy Scott, Foreign Exchange Dealer at HiFX, "Given the continued ‘stickiness' of inflation in the UK and the better than expected growth figures for the third quarter released two weeks ago, it perhaps isn't a big surprise for the BoE to forecast inflation to remain above target for next year, particularly as VAT increases to 20% from January. This does, however, make it look less likely the BoE will go down the Quantitative Easing route if the economy continues to grow and inflation remains above target, hence why Sterling has reacted positively to the report.

"The minutes from the meeting this month will provide further insight into the discussions. There could still be a surprise if any of the other committee members voted for a change in policy. But for now at least, it doesn't look like the bank will be firing up the printing presses anytime soon.

Trading close to 1-week low against the Dollar prior to the release of the report, Sterling gained over 0.5% against both the US Dollar and the Euro.