The pound fell across the board on Wednesday, after the Bank of England's quarterly inflation report said the UK growth outlook had weakened since May.

The central bank said interest rates were likely to remain low for an extended period of time and it predicted inflation would return below 2 per cent in the medium term.

In response, sterling tested the 1.6200 level against the dollar before recovering slightly to sit 0.47 per cent down at 1.6240.

Against the euro, the pound was 0.46 per cent lower at 1.1299 and on the yen it shed 0.88 per cent to 124.4800.

Jonathan Granby, researcher at DailyFX, says: 'Sterling took a dive in the aftermath of the dovish inflation report from the Bank of England (BoE) as the central bank lowered its growth estimates for the UK and CPI expectations. Despite the initial spike below the well supported 1.6200 level GBP/USD managed to pare its declines.

'A clean break of the 1.6200 level should up a move back toward the psychological 1.6000 level.'

The BoE admitted the Consumer Prices Index measure of inflation was still expected to hit 5 per cent in the near term, but would ease once temporary factors faded. The timing of the inflation fall back is highly uncertain, according to the governor of the bank, Mervyn King.

King said the UK economy will recover modestly through 2012, but the euro-area debt crisis posed the greatest risk to the recovery.

The bank's growth forecast for 2012 was pulled back from 2.5 per cent to closer to 2 per cent and the Monetary Policy Committee judged the risks to be to the downside.

Vicky Redwood, senior UK economist at Capital Economics, says: 'The report appears to endorse fully the drop in market interest rate expectations seen over recent weeks. What's more, even the MPC's downgraded growth forecasts look optimistic to us, particularly in the light of the market volatility seen since the MPC would have signed off the report.'

But the Bank of England did not goes as far as the Federal Open Market Committee in the US, which strongly indicated on Tuesday night that US interest rates would not rise until mid-2013.

Talking on the issue of interest rates King said markets already had 2013 priced in for the timing of a loosening of policy. He said it would be foolish to 'commit' to low rates for that length of time, however, because events over the last month had shown how quickly economic circumstances could change.

King was also reticent on the subject of quantitative easing.

Howard Archer, chief European and UK economist at IHS Global Insight, comments: 'While the BoE kept its cards close to its chest on the matter, it clearly has the door open to re-engaging in quantitative easing if the current financial turmoil continues and the economy's struggles continue.'

For the pound, today's inflation report and its accompanying commentary increases the bearish outlook.

But with economies the world over under greater financial pressure, most central banks are likely to be issuing dovish policy statements in the near term and this should help limit the downside potential for sterling.