For the first time since 2006, the sterling fell below $1.90 and is continuing to drop as fears escalate about the UK economy’s ability to fight off a recession.

The pound fell further against a strengthening dollar after it emerged that inflation in July increased by +0.6% to 4.4% in July, which was more than double the Government’s 2% target and the highest since the Bank of England gained its independence in 1997.

This news came as Mervyn King, governor of the Bank of England (BoE), said that he expects “growth to be flat” and does not rule out a recession. He warned that inflation would peak at 5% making it hard for the central bank to cut interest rates in the near future. However, he said that the slowing economy would eventually curb inflationary pressures.

Weak retail sales and housing data indicated that the UK’s economy is slowing. According to the British Retail Consortium (BRC), retail sales were also down in July by -0.9%, while the Royal Institute of Chartered Surveyors (RICS) said house prices fell again in July and the number of completed sales per surveyor slumped to a 30-year low.

King added that consumer spending and house prices would weaken, particularly because of tighter credit conditions that were expected to continue.

In a technical definition of a recession, the economy contracts for two consecutive quarters. The economic picture has worsened since the bank’s last inflation report in May, which forecasted growth to fall to about the 1% mark at the end of this year. And the bank’s prediction is worse than the Government’s official forecast of growth in 2009 of 2.25-2.75%