[LFX]

In the Inflation Report press conference today, Governor King denied that last week's GBP25bn QE extension had been a deliberate attempt to prepare markets for a halt to asset purchases. Nevertheless, we see the Inflation Report projections as being consistent with no further increase of asset purchases.

The MPC revised up its projections for growth and inflation. Inflation is projected to reach the 2% target in about two-and-a-half years and to rise above it thereafter, though it remains below it at the two-year horizon. This contrasts with the August projection that was below target even at the three-year point. Predicated on an unchanged policy rate, the MPC projects that inflation will be above target (about 2.3%) and rising at the two-year horizon. This is similar to the August projection and makes the obvious point that the current level of policy support is viewed as excessively accommodative if it persists for too long. However, the Report and press conference probably lengthened the market's view of the likely duration of policy at current levels somewhat.

GBP is weaker against the EUR and USD by about 0.7%. The FX market pretty much ignored the employment data, which were much better than expected and in contrast to the US and euro area show the unemployment rate as having peaked. MPC will talk dovishly until they tighten because a dovish tone adds to the effectiveness of the loose policy; however, despite the comments, we still see more upside for the UK economy, UK inflation and GBP.