Markets troubled by Bank of England inflation report
The cautious tone of the Bank of England's new Inflation Report has cut market expectations for interest rate reductions this year, with the markets expecting one reduction to 5 per cent in the summer and then another to 4.75 per cent in the autumn - but then not further fall at least until March 2009. Things that could change that would be a sharper fall in demand than at present seems the case, for the latest job fugures have been very strong, with unemployment still falling in January. If however the housing slump were prolonged into 2009 then the bottom of the economic cycle might come later than the Bank currently thinks. It takes about 18 months between the peak of house prices - which was last October/November - and the full effects passing through into the economy. This suggests that the problem year will be 2009, not 2008.

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