City experts are taken by surprise

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Malcolm Barr of JPMorgan Chase Bank: "We would regard this letter as about as dovish as could have been anticipated at this stage. We retain our forecast that rates will hold at 5%. Given that the letter requires the Bank to explain what policy action it is taking to bring inflation back to target, it is about as weak as the Governor could have got away with."

Howard Archer of Global Insight: "While acknowledging that the near-term inflation situation has deteriorated, Mervyn King's letter to the Chancellor is not as hawkish as may have been feared, and very much keeps the Bank of England's options fully open on future interest rate moves. The one thing that can be said with a fair degree of confidence at the moment is that interest rates will not be coming down further any time soon, and that if the Bank of England does act in the near term, it will be to raise interest rates."

James Knightley of ING: "The letter from the Governor is less hawkish than we had expected. The Bank believes inflation will peak later this year and then fall back towards target and they seem at pains to suggest that an aggressive series of rate hikes is unlikely. With inflation likely to continue rising in the near term, we doubt that the Bank will be keen to cut rates soon. The probable outcome now is that we have stable rates through to year-end followed by an aggressive series of rate cuts to combat intensifying downside growth risks in 2009."

Peter Dixon of Commerzbank: "What they are saying is 'yes we are concerned, yes it's a problem, but we're not going to do anything hasty to put the trend in output growth at risk'. It suggests that there's no real reason for the Bank to either raise rates quickly or to cut them."