By Lea Pachta

The Bank of England released its quarterly inflation report this morning, offering “cautious optimism” about Britain’s economic recovery, according to Mark Bolsom, Head of the UK Trading Desk at Travelex, the FX Payments Specialist.

The report showed the MPC expected a slow economic recovery, expected the VAT increase to push inflation above 3 pc in the short term, but thought that spare capacity in the economy would dampen our inflation outlook over the medium term. The report also suggested that UK interest rates would remain on hold for a long period of time.

Bolsom comments, “The MPC continues to sit on the fence with this report. Whilst they say that a gradual recovery is in place and further stimulus is not needed right now, it is clear they do not have overwhelming confidence in sustainable economic recovery as they have left the door open to further quantitative easing. Clearly, as emerging data continues to be mixed they feel it is too soon to get a clear enough picture of where the economy is headed.

“If they were trying to assuage investor concerns about our economic recovery, this report won’t have worked and investors will remain incredibly cautious. It’ll also put further pressure on the pound and its medium-term outlook.

“I’m unsurprised that King alluded to keeping interest rates on hold for a while. I stand by my prediction that the Bank will keep rates on hold at 0.5 pc until 2011 at least.”

Sterling fell 0.2 pc against the dollar during the announcement to $1.5678, and against the euro down 0.1 pc to 87.67 pence.