Tuesday, 27 November 2007

Stocks fall again but monetary policy could stay tight in UK

The recent rally in stock markets has proven short-lived. From MarketWatch:

U.S. stocks fell sharply after a volatile session Monday, as credit worries and continuing woes in the financial sector offset early upbeat signs about holiday shopping...

The Dow Jones Industrial Average slid 237 points to 12,743, as 28 of its 30 components retreated...

Government bonds rallied as investors sought safety, with the benchmark 10-year Treasury bond jumping 1 17/32 to 103 18/32, yielding 3.816%.

The weakness in the US housing market has so far driven much of the global financial market turmoil. But weakness in housing could be spreading worldwide.

Reuters reports that the UK housing market is also cooling.

Annual house price inflation in England and Wales slipped to its lowest in more than a year in November, a survey showed on Monday, as prices fell during the month.

Property consultant Hometrack said house prices were 3.6 percent higher than a year ago, down from an annual rate of inflation of 4.4 percent in October and the lowest since July 2006.

Prices fell 0.2 percent during the month, compounding a 0.1 percent fall in October, although the figures are not adjusted to take seasonal factors into account.

But don't be too quick to assume that the Bank of England will be coming to the rescue soon. From another Reuters report:

British monetary policy may have to remain tight for some time given rising inflation pressures even though financial market turmoil could spread, Bank of England chief economist Charles Bean said...

"The backdrop to our attempts to keep inflation in line with target is less favourable than it has been," Bean was quoted on Monday as saying in the Liverpool Daily Post newspaper.

"What it will mean is if the imported component of inflation is somewhat higher the domestically generated component needs to be somewhat lower to compensate and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down."

But Bean said the repercussions from this year's financial market turmoil could linger for some time and spread to stock markets and commercial property, suggesting policymakers are increasingly worried about a prolonged economic slowdown.

"It will be quite a long time before things come back to a full state of normality," Bean was quoted as saying.

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