On November 14th, the Bank of England said that if inflation is to hit the target that they've set at 2 per cent in the next two years, interest rates will have to decrease in the coming months.
This information is part of the Bank's Quarterly Inflation Report which is the first official and formal assessment of the impact of the credit crunch on the UK's economy. While BoE predicts a lowering of the interest rate, they are still reporting that the economic outlook has deteriorated since the credit crunch took hold in August 2007.
In the report, BoE says that the Consumer Prices Index (CPI) will sit above 2 percent during 2008 due to an increase in energy prices as well as the depreciation of sterling. However, they foresee CPI decreasing to the target of 2 percent by mid 2009.
This assessment is based on the prediction that interest rates will decrease to 5.5 percent (from its current rate of 5.75 percent) in Q1 of 2008, to 5.3 percent by the second half of 2008, and finally down to 5.2 percent by early 2009.
Fears that the UK economy is slowing and that the housing market is quickly cooling down are thought to be the reasons behind the projected interest rate decrease. Reuters polled 50 economists, and of those, 46 believe the Central bank will decrease rates to 5.5 percent by the end of March, 2008.
This information solidifies many speculators' expectations that interest rates will fall twice in the next year, but there is still considerable uncertainty due to the uncertain nature of asset prices, consumer spending, and the global economy.