The pound fell and yields on government bonds sank to record lows yesterday after Mervyn King, Bank of England governor, doused hopes of a swift economic rebound and warned households and businesses of a 'slow and protracted' recovery.
His comments led to a sharp reassessment in financial markets of the likelihood and timing of any rise in interest rates. Investors bet that the Bank’s repo rate – currently at 0.5%, the lowest in its 315-year history – would remain at extremely low levels over the next two years.
The governor pointed for the first time to 'signs that growth has resumed in the third quarter'. But he said the fall in economic output during the recession had been so great that inflation was more likely than not to sink below the official target of 2%. Official data yesterday showed that consumer price inflation fell to 1.6% in August from 1.8% in July. He signalled that the Bank was unlikely to rein in soon its 'quantitative easing' programme to pump hundreds of billions of pounds into the banking system.