FYI | Nov 15 2007
By Rudi Filapek-Vandyck
Expect to see the Bank of England cutting official interest rates in December. That is the message economists at BNP Paribas have drawn from yesterday’s inflation report by the BoE.
Similar to the BoE’s anticipation, BNP Paribas sees inflation risk to the upside in the short term. (Food prices are increasing at their highest rate for more than a decade, official figures showed this week). But equally similar the economists believe this situation will reverse soon as economic growth in the UK slows down – and in their view, quite significantly so.
As such BNP Paribas appears convinced that the central bank’s assessment that “GDP growth may have begun to slow in the fourth quarter” will prove to be conservative.
BNP Paribas believes upcoming economic data in the UK “should convince the Bank [BoE] that economic growth is slowing sharply and that early action to forestall an overly abrupt cooling in the economy is desirable”.
BNP Paribas sees “substantial interest rate cuts throughout 2008, taking Bank rate to slightly below neutral 4.5%” [from the current 5.75% rate].
Why this doom and gloom, all of a sudden?
BNP Paribas is of the view that “[UK] mortgage approvals have yet to fully capture the effects of the seizing up of the money market and particularly the fallout from Northern Rock. This comes above and beyond the slump in new buyer traffic that already pointed to a sharp slowdown in the [UK] housing market even before the financial market crisis.”
Yesterday, Bank of England Governor Mervyn King acknowledged a housing market slowdown had now arrived for the UK. He also warned the credit crunch is likely to persist for many more months yet
To be continued (without any doubt).
