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Bank warns on stock market risks Bank 'signals' interest rate fall
(9 minutes later)
The Bank of England has warned that stock markets, which have rallied this year, risk a fall that could hurt the global economy. The Bank of England has warned of a number of risks to the UK economy next year, in comments that analysts have said point to lower interest rates.
In its quarterly Inflation Report, the Bank also predicted that growth would slow in 2008 and inflation would rise. In its quarterly Inflation Report, the Bank forecast the economy would slow in 2008 and inflation would accelerate.
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. However, it added that even if interest rates fell by half a percentage point, it would still hit inflation targets.
But the bank said the outlook for the economy was still uncertain. Analysts said that this signals that interest rates should dip next year from their current level of 5.75%.
In London, the pound weakened slightly against the euro, US dollar and Japanese yen as markets priced in lower borrowing costs.
"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
Uncertainty
The Bank warned, however, that there was a lot of uncertainty over the outlook for the economy, particularly as the world financial system was still vulnerable to further shocks from factors such as surging energy prices.
It noted there were some signs of a softening in house prices, but said that the link between the housing market and consumer spending was a complex one.
At the same time, it warned that stock markets, which have rallied this year, risked a fall that could hurt the global economy.
"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."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."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 Rate impact
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 forecast that growth was 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. 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.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 marks 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.