[DanRath]

BoE Governor King, in Parliamentary testimony, said that lowering the rate paid on reserves was something the BoE "would reflect on" and might be a "useful supplement" to existing policy tools, although he said that he wouldn't expect it to have a major effect in improving bank lending. The key point here is that the governor gave a clear signal that the issue remains live, but maybe not imminent. Regarding the macroeconomy, some detected signs that the MPC is a little less downbeat about the economic outlook than it was in August. He said that in the UK the support was in place and the next issue was the appropriate timing of its withdrawal. Mr King said stronger money growth may appear as a lagged response to stronger activity (which highlights the difficulty in using the money data as a guide to forward-looking policy). He would be looking at this in tandem with the data on nominal demand.

The MPC testimony unwound the benefit of yet another higher-than-expected inflation outcome with core CPI at 1.8% y/y versus the 1.6% expected -- in 2009 there have been seven underpredictions of core inflation, one over-prediction and one correct outcome. While the buy GBP trade may not give immediate joy, the weight of higher-than-expected inflation and growth numbers will lead to stronger sterling.