With October's CPI inflation outturn more than 1pp above the 2% inflation target, BoE Governor Mervyn King was once again obligated to write a letter to the Chancellor outlining the reasons for the overshoot and the measures being taken to bring inflation back to target.

Although Sir Mervyn's letter may receive greater attention than usual, coming just one day before the publication of the MPC's latest Inflation Report, neither it nor Chancellor Osborne's reply contained any significant new information on policymakers' thinking. The Governor repeated the MPC's judgement that inflation would be below the 2% target in the absence of temporary factors, and would fall back to around the target by the end of 2012 as these temporary factors drop out. He also argued that the UK growth outlook had weakened, owing to developments in the euro area, and that as a result there would be "a greater and more persistent margin of spare capacity than previously thought." Mr Osborne's reply similarly focused on events in the euro area.
 
Today's exchange of letters leaves our expectations for tomorrow's Inflation Report unchanged. That is, we expect the growth forecast to be revised down significantly, and we also expect to see a weaker profile for medium-term inflation. Mr Osborne's letter stated that the OBR's forecasts, to be published on 29 November, "will reflect the action taken by the MPC to meet the inflation target", suggesting that they will incorporate the likely positive impact of QE on growth and inflation. Nevertheless, we expect the OBR to revise down its near-term growth forecasts significantly, compared to its March forecasts.


source: BarCap