The Bank of England’s Inflation Report indicated that CPI may fall below the 2% target as policymakers anticipate a ‘slow recovery,’ and projects price growth to average 1.5% over the next two years. The report also said inflation will probably remain below 1% for the rest of 2009 as the domestic and global economy remains in a deep recession, and expects price growth to be volatile over the short-run. At the same time, Governor King emphasized that the recovery will be slow and protracted, and warned that credit conditions are likely to remain tight as the banking system remains ‘vulnerable to further shocks.’ The central bank head went onto say that the banking system may need to be recapitalized in order to repair banks’ balance sheets, and expects unemployment to rise over the foreseeable future as businesses face fading demands from home and abroad paired with the slump in the mortgage market. Sterling fell immediately after the report was released, with EURGBP hitting 0.8605. Meanwhile, jobless claims in the U.K. increased 24.9K to 1.58M in July amid expectations for a 28.0K rise, while the International Labour Organization’s gauge for unemployment jumped to 7.8% in June from 7.6% in the previous month to mark the highest level since 1996. As households face a weakening labor market paired with tightening credit conditions, the outlook for private spending remains bleak, and businesses may continue to scale back on production and employment throughout the year in an effort to weather the downturn in global trade.
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