BOE
The adjustment in U.K. house prices will be “painful'' for many households as home values fall to a more sustainable level, Bank of England Chief Economist Spencer Dale said.
“A range of indicators point to further weakness in the months ahead,'' Dale said in a speech to business leaders in Dover today. “This process of adjustment will be painful for many households.''
While a decline in the housing market, slowing consumer spending and tighter credit conditions push the economy toward a recession, inflation, spurred by higher energy and food costs, reached an 11-year high. The Bank of England has kept the benchmark interest rate unchanged for the past five months.
“These risks are at present finely balanced,'' said Dale, who voted to keep interest rates unchanged at 5 percent this month. “A return to the remarkable stability of the past decade may not be in prospect. But neither is a return to the boom and bust of earlier years.''
The U.K. will likely go through a period of “broadly flat'' expansion and “relatively high'' inflation, Dale said, adding that growth will resume and inflation return to the bank's 2 percent target “in due course.''
Consumer prices rose 4.7 percent in August from a year earlier, the most since records began in 1997, the Office for National Statistics said on Sept cash advance. 16. Bank of England Governor Mervyn King has said inflation will peak at around 5 percent in coming months.
Inflation Expectations
“I remain alert to the possibility that the current period of high inflation may cause inflation expectations to become less firmly anchored,'' Dale said.
Accelerating inflation has yet to affect Britons' spending. U.K. retail sales unexpectedly increased in August for a second month as stores attracted shoppers with discounts on clothing and footwear, the statistics office said today. Sales climbed 1.2 percent after rising 0.9 percent in July.
Still, a further decline in house prices may depress consumer spending more than expected, Dale said.
“There is a risk that the continuing adjustment of the housing market amplifies the impact of the tighter credit conditions by more than I expect, resulting in a protracted period of weak consumption spending,'' Dale said.
Filed under: finance by Guru