Thu 26 Jun 2008
Inflation will be curbed says King
Bank of England governor, Mervyn King, is confident that inflation will return to the government's target of 2%, but admits that the economy must slow first.His optimism comes despite admitting in his letter to Treasury Select Committee last week that the UK is currently facing it’s "most difficult economic challenge for two decades," during his explanation as to why inflation had hit 3.3%.
If inflation does fall back then this will increase the chances of an interest rate cut, which in turn will cut the cost of borrowing money to finance a property purchase.
However, given the current state of inflation, it’s more likely that that there will be a rate hike before a cut.
With regards to the housing market, King pointed to the fact that the existing outlook is far healthier than that of the last major downturn in the 1990s, with the volume of people in arrears and the number of repossessions much lower today.
However, he projects a "period of extremely weak activity" in the residential sector, due to an uncertainty over property prices.
"None of us can really know where house prices will go," King added.
"We are going through a period of adjustment now, in which, because any prospective purchaser can't really judge the likely level of house prices and where they'll settle.
"It would be a very natural response to pull back and to wait until the market's reached a new equilibrium before coming in."