Bank of England inflation report

This report sets out a detailed economic analysis as well as inflation projections on which the bank bases its interest rate decisions.

UK government bonds declined ahead of the report this morning, while the Sterling rose against the US dollar after reports showed that unemployment dropped in the past three months.

Governor Mervyn King expects the UK economy to shrink in the current quarter, subduing recovery for the second largest economy in the region as the Eurozone crisis continues. We can also expect inflation to increase to 2.6% by next year, 0.6% more than the Bank of England's target of 2%.

The GDP is projected to decline as the Euro debt crisis is one of the biggest risks for the UK economy. The repercussions of such could lead to a decrease in demand and productivity.

With news that the UK economy is set to contract, the pound continued to decline against the Euro and erased an earlier gain against the dollar.

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