The Bank of England will need to make two interest rate cuts next year in order to halt an economic slowdown, it revealed yesterday in its November inflation report.
The BoE’s report showed that inflation would fall well below its 2 per cent target in two years’ time if UK interest rates were held at 5.75 per cent but it would be on target if rates were cut twice in 2008.
BoE governor Mervyn King says that decisions on rates would be difficult in the coming months. He says that the important question was whether “the slowing we expect to see, or we’re going to see, bigger than the slowing that we have wanted to see.”
On Tuesday, the Office for National Statistics announced that the CPI rate for October had jumped from 1.9 per cent to 2.1 per cent, due to higher fuel and food prices.
The BoE report says that the rate of inflation is likely to rise further next year, but would subside again to the target rate in 2009.
King said: “We’re seeing now quite a significant impact in terms of surveys on the housing market. In some ways we needed to get away from the period when we saw double-digit growth. We needed a cooling in the housing market: how far it goes remains to be seen.”