Blow for homeowners as rate cuts are abolished - May 2008

Further rate cuts for home-owners appear unlikely for 2008 as those in charge struggle to control runaway inflation. (The Bank of England signalled this on the 14th of May 2008).

The Bank's latest quarterly inflation report suggests the Consumer Prices Index (CPI) will remain well above its 2% target in two years time, if interest rates are cut now.

But in contrast other analysts had predicted rates would be cut by 0.5% to 4.5% but with inflation hitting a six-year high at 3 per cent that no longer seems possible.

The warning comes in a gloomy set of forecasts which predicts the CPI could spike as high as 3.7% this year and remain above 3% until well into 2009. With inflation under pressure from surging oil, food and household energy bills - as well as a weaker pound across Europe - growth is expected to fall as low as 1% for 2008.

This fall is well below official Treasury predictions and comes as the credit crunch bears down on lending, house prices and consumer spending, slowing the economy to a crippling degree, many feel this is just the start.

Governor of the Bank of England Mervyn King said its Monetary Policy Committee faced an even more challenging balancing act between controlling inflation and preventing an economic slowdown. He equally warned of a difficult period ahead for households as inflation rises.

"As price increases feed through to household bills, they will lead to a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply."

Mr King added:-

"The credit cycle has turned. Commodity prices are rising. We are travelling along a bumpy road as the economy rebalances."

Inflation will return to the target and growth will eventually recover to a sustainable rate. But we will need to be patient.

"These forecasts, which said there was a risk that the UK's economic slowdown "could be more prolonged", is the latest in a succession of miserable economic data this week.

On Monday official figures showed factory gate prices rising at a record rate during April and property prices dropping by up to ten per cent.

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