In February the Bank of England (The Old Lady of Threadneedle Street) had forecast U.K. GDP growth of 2.7 pct in 2005 and 2.8 pct in 2006, but a May 6 Bloomberg survey of 17 economists resulted in consensus growth of 2.6 pct this year and 2.5 pct in 2006.

The reason for the U.K. pessimism is that April retail sales had their biggest annual drop in at least 10 years, March manufacturing declined 1.6 pct, the most in almost three years, total industrial output fell 1.2 pct, and the 10-year real estate boom is finally sputtering. Starting to sound familiar?

So, last Friday (May 6), the BOE left their benchmark rate unchanged at 4.75 pct for the ninth consecutive month. Prior to that, in order to contain inflation, BOE had raised their rates five times between November 2003 and August 2004.

Sometimes these central bank moves are based mostly on maintaining a balanced cross-rate in foreign exchange markets, and less on fighting domestic inflation.

Since December, a significant yield decline in interest-rate future contracts in the U.K. has indicated to traders that bond investor appetites are sizeable, and that BOE will probably cut rates before the end of this year.

But U.K inflation hadn't at that point exceeded the 2-pct BOE target since 1998.

This morning, the BOE quarterly inflation report was released. The report said it expects CPI inflation to rise above the 2 pct target in the near term due to temporary factors before coming back to the 2 pct level over the two year horizon. This is an important development.

Bank of England governor Mervyn King reported that the slowdown in retail spending is a real threat to the U.K. economy, saying, "The slowdown in retail spending is more than an erratic movement around the turn of the year; The evidence now suggests that the contribution of consumption to activity growth is lower than for some years;As a result, the prospects for consumption are a key source of uncertainty surrounding the central projection."

King cited profit warnings from retailers and business surveys as indicative of softness in consumer spending. But he also said that household spending growth is likely to recover but to remain lower than recent years.

The BOE quarterly inflation report starts with an overview of economic developments; which is followed by six sections:
· analysis of money and asset prices
· analysis of demand
· analysis of output and supply
· analysis of costs and prices
· summary of monetary policy during the quarter
· assessment of the medium-term inflation prospects and risks

As stagflation is an issue in the U.K., as well as the U.S., serious traders might want to have a look at the BOE Report.

Also, you are aware that the London Stock Exchange Financial Times Stock Index (FTSE) is a notable index. I check it every morning.

Well, issue 7 of FTSE Global Markets magazine is now available. The company says their magazine "provides the best in comment and analysis on the world's equity and debt markets."

Finally, since the BOE Report came out this morning, the Pound has weakened against the USD in initial trading.