Bank of England Warning Over UK Economy - Stagflation Risk During 2008

By: Nadeem_Walayat

Mervyn King, the Bank of England Governor belatedly recognised that the credit crunch is likely to strongly impact the UK Economy during 2008 resulting in a sharp slowdown accompanied by rising inflation going into 2008.

The Governor and Bank of England stated:

"We have seen without any doubt a tightening of credit conditions in terms of bank lending rates and the quantity they are willing to lend "

“the slowing we expect to see, or we're going to see, [is] bigger than the slowing that we have wanted to see”.

"Although conditions in some markets have since improved, the global financial system remains vulnerable to further shocks,""The possible impact on spending of recent and prospective developments in financial markets represents a key uncertainty surrounding the outlook."

The Market Oracle forecast for some time has been for sharply lower growth of 1.4% during 2008, as against the consensus and Treasury forecasts ranging from 2.2% to 2.5% and the Bank of England's latest forecast of 2.2%.

The Banks quarterly inflation report showed an inflation up tick during early 2008, though painted a dovish note on interest rates, and suggests that rates may fall by 0.5% during 2008. The October inflation statistics confirmed this trend with the governments preferred measure, CPI rose to 2.1% from 1.8%, due to a rise in fuel and food prices. The RPI which is closer to the real rate of UK inflation surged to 4.2%.

The Market Oracle forecasts are that despite the latest inflation report suggesting an up tick in inflation during 2008, this is seen as temporary with inflation as measured by RPI targeting 3% by the end of 2008. The Interest rate forecast is for UK rates to fall to 5% from the current 5.75% by September 2008 with the first cut in interest rates forecast for January 2008. This is despite inflationary concerns, as the global credit crunch accompanied by a UK housing slump will impact on UK growth for several years, thus is expected to have a deflationary effect on the UK weakening economy and bring inflation down by the end of the first half of 2008.

See key articles below for full analysis on the UK housing market and interest rates during 2008

By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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