Recent trend in the global market and credit crunch in the domestic market might be the harbinger of an economic slowdown for UK. The Bank of England’s top economist Charlie Bean forecasted a severe economic downturn on Wednesday, 31 October, in a City of London speech.
Britain has faced its first ever bank run for over a century, when Northern Rock announced its problem. According to Bean, the run of Northern Rock had the potential of significantly damaging the economy. No banker foresaw the dramatic chain of events that led to the sharp stock market declines last summer and the bank run.
As a result, the banks have been conserving cash causing severe credit crunch. This is leading to squeezing of household finance and softening of economic growth. If households have to save more and borrow less this means less spending in the shops.
The crisis in the US property market has further led the global banks to rein in their lending.
With reduction in the supply of cheap mortgages and banks becoming stricter on their lending norms, the housing market will be the worst affected. With fall in prices of both equity and property there will be adverse affect on the supply and price of credit. Bad news for the citizens of UK is that the Bank of England has no intention for the time being to slash interest rates.
In this context, the bank of England is acting just opposite to the role the Fed is playing in the US. The Fed has resorted to slashing the interest rates to rescue its housing industry.
Inflation has also become a major concern for UK with rapid increase in food prices and oil prices touching a record high of $94 a barrel. Businesses are raising their prices over the board. The Bank of England is supposed to keep inflation close to its 2 percent target, so any danger of rising inflation will prevent it from slashing interest rates. The Bank of England has kept its target rate of interest at 5.75 percent throughout the financial crisis that erupted in August.
A strengthening pound against dollar has further added to the woes of the domestic UK industries. There is a boom in shipments of goods to UK from the American suppliers. The weakening dollar has made shopping of US goods much cheaper. The pound’s 26 year high against the US dollar means more Christmas shopping online from US sellers. A spokesperson of eBay, the online auctioneer, has said that the number of British bidders for US goods had increased by 50 percent over the past year.
The Bank of London’s rate setting committee will meet next Thursday to discuss on the interest issue. The economists are said to be divided over the issue of trimming rates to salvage the sinking British economy.
Source: daily mail
Image: BBC
