Wednesday 14 November 2007

Time to cut interest rates in the UK?

Many economists think that the next move in UK interest rates is down. There are some good reasons for thinking so.

A survey from the Royal Institution of Chartered Surveyors showed yesterday that British house prices are falling at their fastest pace since mid-2005.

A UBS report on Monday said that risk aversion among investors is at a high level, and among equity investors in particular has turned "extreme".

On the other hand, equity markets recovered yesterday. In fact, equity markets rallied strongly in the US yesterday while the US housing market received some positive news in the form of an increase in pending home sales in September.

But perhaps more ominously, UK inflation accelerated in October. The Office for National Statistics reported yesterday that consumer prices rose 0.5 percent in October, taking the annual rate up to 2.1 percent, the highest level since June, from 1.8 in September. On Monday it had reported that annual factory gate inflation jumped to 3.8 percent in October, its highest level since December 1995, from 2.8 percent in September.

Inflation may not be dead yet in the UK. But we'll know more later today after the Bank of England releases its quarterly inflation report.

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