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Bank 'signals' interest rate fall Bank warns on stock market risks
(31 minutes later)
Interest rates could fall in coming months, the Bank of England has signalled on Wednesday. The Bank of England has warned that stock markets, which have rallied this year, risk a fall that could hurt the global economy.
In its quarterly Inflation Report, the Bank has predicted that inflation will meet its 2% target next year even if rates fall by half a percentage point. In its quarterly Inflation Report, the Bank also predicted that growth would slow in 2008 and inflation would rise.
The Bank has raised its interest rate to 5.75% in past months as it looks to control inflation. Analysts said the report's predictions meant that interest rates could fall in coming months as the Bank looks to keep the economy on an even keel.
The Bank also cut 2008 economic growth forecasts to around 2.2%, following a similar downgrade by the Treasury. But the bank said the outlook for the economy was still uncertain.
"It's very striking that despite developments we've seen in the last three months, equity prices are on average higher now than they were in August," said Mervyn King, the bank's governor.
"There must be some downside risks there. That's factored into our projections. That's the bigger risk to the global economy," King said.
Growth to ease
Growth is expected to ease as the impact of five rate rises in 15 months, the current strength of the pound and the recent uncertainty in financial markets slows the economy.
In its report, the Bank cut its 2008 economic growth forecasts to around 2.2%, following a similar downgrade by the Treasury.
But the Bank also expects inflation to rise in the short-term as higher energy prices begin to bite.
The report marked the first formal assessment of the impact of the credit crunch that has gripped markets.The report marked the first formal assessment of the impact of the credit crunch that has gripped markets.
The report validates market expectations that interest rates will be cut twice over the course of 2008 as slowing growth reduces inflationary pressures.
"November's Inflation Report gives a clear signal that a series of interest rate cuts lies ahead," said Vicky Redwood, an economist at Capital Economics
The Bank warned, however, that there was a lot of uncertainty over the outlook, particularly as the world financial system was still vulnerable to further shocks.
The central bank also noted there were some signs of softening in house prices but said the link between the housing market and consumer spending was a complex one.