“It may still (just) be summer, but there is a feeling of chill in the economic air,” according to Governor Mervyn King speaking yesterday after the publication of the Quarterly Inflation Report. The Bank of England’s August Inflation Report took the market by surprise: it now seems that The Bank is becoming gradually more concerned about the economic outlook rather than the immediate and anticipated spike up in inflation.

They demonstrate through projections in the report that with market rates set where Bank Rate is now (5%), we should hit the inflation target of 2 % in 2010. Market rates of course are not trading at 5%, they are much higher, with 3 months LIBOR at 5.77 % and one year at 6.12 %. The market has interpreted this factor as meaning that we are likely to undershoot the 2% target, if rates are not adjusted down sooner rather than later. As a result the HSBC economists are now looking for a cut in rates as early as November.

On a day when Sterling was already under pressure because of the new found strength of the US Dollar, the pound fell by 2 cents very quickly as a direct result of this report and then throughout the rest of the day continued to fall another 1.5 cents. At the same time it also lost 2 cents against the euro falling from 1.2740 to 1.2540 throughout the day.

Today is light on economic news from the UK. In Europe we get an avalanche of data, both from the ECB itself and various major countries. These should help show how fast Europe is heading towards recession. This afternoon sees US CPI at 13.30 BST.

For more information, please download today's HSBC Economic Update.