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Highlights:

 
 
Article snip:

BoE Cuts Growth Forecasts, Jobless Climbs (Bloomberg) The BoE cut its forecast for U.K. economic growth and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years in July. Governor Mervyn King said the inflation rate will fall below the 2 % target in two years if policy makers keep the benchmark interest rate at 5 %.

But not if they cut is the implication as well.

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Highlights:

 
 
 
Article snip:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation (Bloomberg) - The ECBkept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts. ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 %, as predicted by all 60 economists in a Bloomberg News survey. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows. The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe’s manufacturing and service industries contracted for a second month. ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today’s decision.

Same as UK, less costly to address inflation now rather than support growth and address inflation later if it gets worse.

It’s been said in the US that the Fed needs to firm up the economy first, and then address inflation. To most Central Bankers this makes no sense, as they use weakness to bring inflation down.

In their view that means the Fed wants to get the economy strong enough to then weaken it.

The Fed majority sees it differently.

They agree with the above.

However, for the last year they have been forecasting lower inflation and lower growth were willing to take the chance that supporting growth would not result in higher inflation.

Now, a year later, the FOMC is faced with higher inflation and more growth than the UK and Eurozone, and systemic ‘market functioning’ risk remains.

The FOMC continues to give the latter priority as they struggle with fundamental liquidity issues that stem from a continuing lack of understanding of monetary operations.

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The mainstream view remains the cost of a near term recession in order to bring prices under control now is far less than the cost of a recession later if you support growth now and let prices continue higher.

Bank of England holds interest rate at 5%

by Gary Duncan, Grainne Gilmore

The Bank of England rebuffed mounting concerns over the rapidly weakening economy today and held interest rates at 5 per cent as it pursued its drive to quell soaring inflation.

The tough verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) brushed aside pleas from business leaders and trade unions for a cut in base rates to shore up Britain’s growth, amid growing fears that the country is on the brink of recession.

The Bank’s decision came after headline consumer price inflation leapt to a 10-year high of 3.8 per cent in June, well above the Bank’s 2 per cent target, and amid expectations that it could hit 5 per cent over the summer, following swingeing increases in household gas and electricity bills imposed by utility companies.

The MPC had been widely expected to spurn pressure for a rate cut today in a bid to make clear its determination to bring inflation back to the target set by the Chancellor. The committee will almost certainly have discussed raising rates this morning, as it did last month, when Professor Tim Besley, voted for an immediate increase. He is expected to have done so again today, and may have been joined by other hawkish MPC members.

The Bank will set out its thinking more clearly next week when it publishes its latest forecasts for the economy in its quarterly Inflation Report. That is expected to emphasise the dilemma that the MPC confronts, with inflation set to soar far above target in the next few months, even as the economy slides towards a severe downturn.

The quandary facing the Bank was underlined yesterday as the International Monetary Fund sharply cut its forecasts for Britain’s growth this year and next, while issuing a warning that it saw “little scope” for interest rates to fall, although it also saw no need for an immediate rate rise.

Today’s no-change verdict by the MPC came despite bleak economic news in recent days, which have produced danger signs of recession.

Concern that Britain’s growth had ground to a virtual halt last month, and could even be in the grip of recession, were inflamed this week after bleak figures revealed growing frailty in the most critical parts of the economy.

These included shrinking activity in the services sector, the economy’s engine room that account for three quarters of the UK’s output, as well as in manufacturing.

The services sector, spanning businesses from cafes and leisure centres to accountancy and law firms, shrank for a third month in succession last month, according to the latest purchasing managers’ survey, regarded by the Bank as a key gauge of economic conditions.

Although services activity edged up from a seven-year low that was plumbed in June, the survey pointed to an even sharper slowdown ahead, with levels of outstanding business for the sector’s companies falling for a tenth month in a row, and inflows of new business dropping to a record low.

At the same time, it emerged that manufacturing is suffering its first sustained run of decline since 2001, after its output fell in June for a fourth month in a row, dropping by 0.5 per cent.

The figures were among the latest data confirming the dire plight of the economy, and came after official confirmation that the pace of Britain’s overall growth slowed to just 0.2 per cent in the second quarter, its weakest rate of expansion for three years.

The falling housing market remains a key source of economic anxiety, with the Nationwide Building Society reporting that house prices tumbled by a further 1.7 per cent last month, leaving them down 8.1 per cent on last year - their sharpest annual pace of decline since 1991.

The high street is also being badly hit by the downturn, with official figures showing that retail sales plunged by 3.9 per cent in June - their biggest monthly drop for 22 years.

Yesterday, the International Monetary Fund added to the mood of pessimism as it cut its forecast for Britain’s growth this year and next to only 1.4 per cent, and 1.1 per cent, respectively. The prediction of the UK’s worst performance since the end of the last recession raised the spectre of two years of economic misery.

In May, Mervyn King, Governor of the Bank, was forced to write an explanatory letter to the Chancellor, required by law, explaining why inflation had risen more than 1 point above its 2 per cent target, after it climbed to its then-high of 3.3 per cent. Mr King has admitted that he expects to write more such letters this year.

The Bank’s inflation headache has been further aggravated by signs of further severe price pressures in the pipeline to the consumer, Manufacturers’ costs rose at a record 30 per cent annual rate in June, and prices for goods leaving factories rose by a record 10 per cent. Inflation is being stoked by a sharp slide in the pound, by about 12 per cent over the past year, which lifts Britain’s bills for imported products.

However, there has been some let up in international food and energy costs, with oil prices tumbling by 13 per cent in a month, and prices for food products are also on the slide.

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(an email exchange)

>   
>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>   
>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
>   
>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way - falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren

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Highlights:

U.K. Hometrack House Prices Fall the Most Since 2001

by Brian Swint

(Bloomberg) The average cost of a residential property in England and Wales slipped 4.4 % in July from a year earlier to 168,500 pounds ($336,000), Hometrack Ltd. said. Prices fell 1.2 % from June. “With no immediate end in sight to the current uncertainty, activity levels are likely to remain suppressed with prices remaining under pressure into the autumn,” said Richard Donnell, director of research at Hometrack. Prices “are now back to levels last seen in October 2006.” Demand for housing has declined 20 % in the past three months, Hometrack said.

Note how much higher prices are vs the US.

It’s another case of going up very fast and now working its way down towards a more historically normal trend line.

But as in the US, they never come down quite that far before turning up on a new path from a higher base as much of past ‘inflation’ remains indefinitely.

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The deficit will go higher. The only question is whether it will go higher the nice way (proactive spending or tax cut to restore demand and growth), or the ugly way (revenues fall and transfer payments go up until the deficit is large enough to restore financial equity and aggregate demand).
Solvency is not an issue. The choice is purely political.

British finance minister paints bleak picture of economy

Britain’s economic downturn is worse than previously thought and there is no extra money available for public spending, Chancellor of the Exchequer Alistair Darling said in an interview published Saturday.

There’s the problem. They’ve got it backwards - the money to pay taxes comes from government spending, not vice versa as they think.

Darling also told The Times newspaper that taxpayers were at the limit of what they were willing to pay, a day after official data showed a record deficit in Britain’s public finances, and reports that the government might bend its budget rules.

“At Christmas most people remained hopeful there would be an improvement by the autumn,” he said.

“Most people would now say it’s far more profound. It’s affecting every economy and everybody. I can’t say how long it will last.”

He added: “We are going through a very, very difficult time.”

Yes, and the government is making it worse.

Darling said that the economic picture was “at the bottom end of my range” set out in his annual budget in March.

On public spending, the finance minister said he has been “very clear with my colleagues that there is no point them writing in saying, ‘Can we have some more money?’ because the reply is already on its way and it’s a very short reply.”

“I told them at the last meeting of Cabinet they’ve got to manage within the money they’ve got.”

Again, they’ve got it backwards - the money to pay taxes comes from govt spending, not vice versa as they think.

The Office for National Statistics said on Friday that public sector debt at the end of June was at 38.3 percent of GDP, but increased to 44.2 percent when the impact of nationalised mortgage lender Northern Rock is included.

Japan’s been at 150%. Doesn’t matter. It’s all a function of private/non-government savings desires which are a function of institutional structure, including tax advantages for not spending income for the likes of pension fund contributions, ins reserves, etc.

Public finances were at a record deficit of 15.5 billion pounds in June compared with the same time last year, well over market expectations of a 12.3-billion-pound deficit.

So? If demand is deemed too low it’s not enough, whatever it is.

The Financial Times, meanwhile, reported that finance ministry officials were working on plans to revise the rules to allow for increased borrowing without raising taxes amid the current economic downturn.

In actual fact they spend first, then borrow, but they don’t know that either.

One of the fiscal rules sets a government borrowing limit of 40 percent of national income.

Yes, a self imposed constraint not inherent in the system.

In The Times interview, Darling played down the report and reiterated comments made Friday that the Treasury constantly reviews its fiscal rules.

He noted, however, that while voters will “pay their fair share … you can’t push that.”

“My judgment is that there are a lot of people in this country who feel they work hard, they make their contribution and they’re feeling squeezed.”

Yes they are, but the deficit isn’t the problem.

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Bank deputy chief warns of market trouble to come

by Ben Russell, Political Correspondent and Sean O’Grady

Britain is facing the risk of renewed turmoil in the financial markets, the new deputy governor of the Bank of England warned yesterday.

Professor Charlie Bean, the deputy governor for monetary policy and a former chief economist at the Bank, raised the prospect of a slowing global economy triggering a new round of problems with corporate loans and said that the impact of the credit squeeze could be greater than Bank projections.

Yes, but unlike the Eurozone, the BoE is permitted to ‘write the check’ as in the treasury.

National solvency is not an issue in the UK as it is in the Eurozone when weakness is addressed.

He told members of the Commons Treasury Select Committee that Britain faced “major conflicting risks” threatening the Government’s inflation target from the problems of a slowing economy and rising commodity prices.

Yes, the twin themes of weakness and inflation.

In a memorandum to the committee, Professor Bean warned that the “dislocation” in the financial markets “probably has further to run, especially if a slowing economy here and abroad generates a second round of write-downs, this time associated with corporate loans. Moreover, the impact of the tightening in the terms of availability of credit could prove greater than is embodied in the central case in our most recent set of projections”.

Agreed. And while ‘writing the check’ can readily address these issues with no risk to government solvency, it will also support the higher prices he next discusses:

He said that increasing oil and other commodity price rises would lead to higher inflation becoming “embedded in the economy”, warning that people might seek to offset price increases by making higher wage demands. He said: “There is no doubt that the UK economy presently faces the most challenging set of circumstances since at least the early 1990s and probably earlier.”

Professor Bean said oil prices could continue to rise for another two years and cautioned that Britain faced the danger of a pay-price spiral if workers tried to compensate by pushing up wages. He said: “It certainly poses a significant challenge. There is no doubt about that at all. It may be a relatively unlikely event but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low, round about the target, they start building it into their pay and prices and inflation becomes much more embedded into the system… Provided pay growth remains subdued, the current pick-up in inflation will be temporary.”

Living standards, the deputy governor stressed, will inevitably be lower because of the global inflation in commodity prices.

Agreed. It’s all about real terms of trade, which have also been declining rapidly in the US as evidenced by the drop in growth of GDP and the drop in non-oil trade deficit.

My guess is the most likely political response in the US and the UK is proactive deficit spending from the treasury to address the weakness and higher interest rates to address the inflation.

Unfortunately the deficit spending that supports domestic demand will also support crude consumption (as well as housing) and ‘monetize’ the ever higher crude prices being set by the Saudis, thereby supporting ‘inflation’ in general.

And this will trigger ever higher interest rates from the Central Bank as inflation trends even higher.

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Here’s how relative value stories ultimately change to inflation stories:

U.K. Government Worker Union ‘Prepares for Battle’ on Wages

By Mark Deen

(Bloomberg) Britain’s largest union for government employees urged members to “prepare for battle” and be ready to strike, stepping up pressure on Prime Minister Gordon Brown to hand out pay awards that meet the rising cost of living.

“Working people, our people, are taking a hit,” said David Prentis, general secretary of Unison, which represents 1.3 million public sector workers. “Our union will organize the most powerful campaign ever seen in support of public services.”

The comments, made in a speech and accompanied by advertisements in U.K. newspapers today, rebuff Chancellor of the Exchequer Alistair Darling’s call for wage restraint as he seeks to combat rising food and energy prices and a slowing economy.

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(an interoffice email)

>
>   On Tue, Jun 17, 2008 at 7:58 AM, DV wrote:
>
>   Mervyn King was required this morning to write a letter to the
>   Chancellor explaining why inflation was greater then 3% in the UK
>   (released this morning at 3.2% vs. 3% previously). The letter follows
>   and was taken as dovish by the markets as it seemed to have more
>   emphasis on the weakening economy then additional upside inflation
>   risks.
>
>   DV
>

Letter to the Chancellor

The CPI inflation rate for May, to be published at 9:30 am tomorrow by the Office for National Statistics, is 3.1%. That is more than one percentage point above our target of 2%. Under the terms of the remit you have given us, I am, therefore, writing an open letter to you today on behalf of the Monetary Policy Committee. As requested by the National Statistician, in order to avoid conflict with the release of the official statistic, in this case the CPI, the Bank of England will publish this open letter at 10:30am.

Our remit specifies that an open letter should explain why inflation has moved away from the target, the period within which we expect inflation to return to the target, the policy action that the Committee is taking to deal with it, and how this approach meets the Government’s monetary policy objectives.

Why has inflation moved away from the target?
Inflation has risen sharply this year, from 2.1% in December to 3.3% in May. That rise can be accounted for by large and, until recently, unanticipated increases in the prices of food, fuel, gas and electricity. These components alone account for 1.1 percentage points of the 1.2 percentage points increase in the CPI inflation rate since last December. Those sharp price changes reflect developments in the global balance of demand and supply for food and energy.

In the year to May:

• world agricultural prices increased by 60% and UK retail food prices by 8%.
• oil prices rose by more than 80% to average USD123 a barrel and UK retail fuel prices increased by 20%.
• wholesale gas prices increased by 160% and UK household electricity and gas bills by around 10%.

The global nature of these price changes is evident in inflation rates not only in the UK but also overseas, although the timing of their impact on consumer prices differs across countries. In May, HICP inflation in the euro area was 3.7% and US CPI inflation was 4.2%. As described in our May Inflation Report, inflation is likely to rise significantly further above the 2% target in the next six months or so.

The May Report set out three main reasons for this:

• The increase in oil prices will continue to pass through to the costs faced businesses.
• Rising wholesale gas prices are expected to lead utility companies to announce further tariff increases. There is considerable uncertainty about their size and timing.
• The depreciation of sterling, which has fallen some 12% since its peak last July, has boosted the prices of imports and will add to the pressure on consumer prices.

The Committee’s central projection, described in its May Inflation Report, was for CPI inflation to rise to over 3 1/2%% later this year. But in the past month, oil prices have risen by about 15% and wholesale gas futures prices for the coming winter have increased by a similar amount. As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%. I must stress, however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity charges.

There are good reasons to expect the period of above-target inflation we are experiencing now to be temporary. We are seeing a change in commodity, energy and import prices relative to the prices of other goods and services. Although this clearly raises the price level, it is not the same as continuing inflation.

There is not a generalised rise in prices and wages caused by rapid growth in the amount of money spent in the economy. In contrast to past episodes of rising inflation, money spending is increasing at a normal rate. In the year to 2008 Q1, it rose by 5 1/2%, in line with the average rate of increase since 1997 - a period in which inflation has been low and stable. Moreover, in recent months the growth rate of the broad money supply has eased and credit conditions have tightened. This will restrain the growth of money spending in the future.

Over what period does the MPC expect inflation to return to the target?
It is possible that commodity prices will rise further in the coming months - oil prices have now been rising for four years. But in the absence of further unexpected increases in oil and commodity prices, inflation should peak around the end of the year and begin to fall back towards the 2% target. Nevertheless, each monthly rise in food, energy and import prices will, by pushing up the overall price level, affect the official twelve-month measure of inflation for a year. So CPI inflation is likely to remain markedly above the target until well into 2009.

I expect, therefore, that this will be the first of a sequence of open letters over the next year or so. The remit for the Monetary Policy Committee states that:

“The framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”.

The Committee believes that, if Bank Rate were set to bring inflation back to the target within the next 12 months, the result would be unnecessary volatility in output and employment. So the MPC is aiming to return inflation to the 2% target within its normal forecast horizon of around two years, when the present sharp rises in energy and food prices will have dropped out of the CPI inflation rate. Nevertheless, the Committee is concerned about the present and prospective period of above-target inflation. It is crucial that prices other than those of commodities, energy and imports do not start to rise at a faster rate.

That would happen if those making decisions about prices and pay began to expect higher inflation in the future and acted on that. It could also happen if employees respond to the loss of real spending power that results from higher commodity prices by bidding for more substantial pay increases. Pay growth has remained moderate. But surveys indicate that higher inflation has already had an impact on the public’s expectations of inflation. For that reason, the Committee believes that, to return inflation to the target, it will be necessary for economic growth to slow this year.

A slowdown is already in train. Moreover, as described in the Committee’s May Inflation Report, the prospective squeeze on real incomes associated with higher inflation, together with the reduced availability of credit, is likely to lead to a further slowing in activity this year. This will reduce pressure on the supply capacity of the economy and dampen increases in prices and wages. What policy action are we taking? Since December, Bank Rate has been reduced three times, to stand at 5%. When setting Bank Rate the Committee has faced a balancing act between two risks. On the upside, the risk that above-target inflation could persist explains why the Committee has not responded more aggressively to signs that the economy is slowing. On the downside, the risk is that the slowdown could be so sharp that inflation did not just return to the target but was pulled below. This explains why Bank Rate has been reduced at a time when inflation is above the target.

The MPC will discuss at its July meeting the implications of the latest inflation and other economic data for the balance of these risks. That analysis will be described in the minutes, published two weeks later, and a fully updated forecast will be presented in the August Inflation Report. The path of Bank Rate that will be necessary to meet the 2% target is uncertain. The MPC will continue to make its judgement about the appropriate level of Bank Rate month by month.

How does this approach meet the Government’s monetary policy objectives?
Over the past decade, inflation has been low and stable. Volatility in commodity, energy and import prices means that inflation will now be less stable but it does not mean that inflation will persist at a higher rate. The Committee will maintain price stability by ensuring that the rise in inflation is temporary and that it returns to the 2% target. In the short term, this commitment should give those setting prices and wages some confidence that inflation will be close to the target in the future. That will minimise the slowdown in economic activity that will be necessary to ensure that inflation does fall back. In the longer term, price stability, as our remit states, is “a precondition for high and stable levls of growth and employment”.

We have seen in the past how the need to reduce inflation from persistently high levels has required prolonged periods of subdued economic growth. The resulting instability in our economy deterred investment and contributed to poor economic performance over a longer period. The Monetary Policy Committee remains determined to set interest rates at the level required to bring inflation back to the 2% target, and I welcome the opportunity to explain our thinking in this open letter.

I am copying this letter to the Chairman of the Treasury Committee, through which we are accountable to Parliament, and will place it on the Bank of England’s website for public dissemination.

Thanks, seems the risk of crude rising continuously due to demand continues to be downplayed by the world’s central bankers even though it has been the case for several years, so they continue to pursue policies that in their models are designed to at least support demand.

I continue to suggest mainstream history will not be kind to them.

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Looks functionally the same as direct lending to the banks vs their mortgage-backed securities.

Don’t know why they are taking this indirect route. Maybe because the Fed is also doing a security lending facility vs direct lending, and the BOE doesn’t want to show them up by doing it right as a gesture of solidarity.

Like everyone in Spain talking with a lisp when pronouncing the ’s’ sound because the king did way back.

Gets stranger by the day.

Treasury and Bank to publish mortgage remedy

by Chris Giles

The government and Bank of England’s plan to unblock mortgage markets will be published today, but its broad outline began to emerge shortly after Mervyn King, Bank governor, met the heads of the main British banks a month ago.

Unlike other European countries, which wanted to change accounting rules to increase the value of mortgage-backed securities on banks’ books, the British authorities have aimed to acquire these assets at a price higher than the current market values but lower than the price that reflects the fundamental risk of default.

Because they reckon a gap between the two prices exists, the intention is to ease the liquidity strains on banks without the taxpayer adopting much extra risk or buying assets that are fundamentally under water.

With Treasury approval, the Bank of England is to swap mortgage-backed securities for government paper for a year, with an understanding that these year-long swaps will be extended for a further two years.

The programme will act as a new Bank of England facility by which banks will be given short-dated and highly liquid Treasury bills with maturities of one year or less. The Bank will accept mortgage-backed securities and other asset-backed securities in exchange. So arrangements will not be counted as new government debt by public sector books.

Things may have started turning up in March in the UK as well as the US and the eurozone.

U.K. Business Spending Reaches Highest Since 2005 (Bloomberg) - U.K. business investment rose to the most in 2 1/2 years in the fourth quarter, led by manufacturing companies. Investment in equipment, vehicles and buildings rose 1.8 % from the three months through September, the Office for National Statistics said today in London. Spending rose 5.3 % from a year earlier to 36.7 bln pounds, the most since the second quarter of 2005. The report suggests manufacturers, which account for 15 % of the economy, spent on their businesses after profiting from a weaker pound and reaching the strongest level of factory production since 2001 last year.

U.K. Sales Index Rises for First Time in Four Months, CBI Says (Bloomberg) - An index of U.K. retail sales rose for the first time in four months in March as shoppers spent more on shoes and groceries, the Confederation of British Industry said. The survey of 152 retailers showed 36 % sold more goods than a year earlier and 35 % sold fewer, the biggest U.K. business lobby said today. The net rounded balance of 1 %age point was higher than the minus 3 from last month.

U.K. Mortgage Approvals Drop to Least Since 1999

By Jennifer Ryan

(Bloomberg) U.K. mortgage approvals dropped in December to the lowest in at least nine years, and consumer credit fell, threatening the outlook for economic growth.

Lenders granted 73,000 loans for house purchase, down from 81,000 in November and the least since records began in January 1999, the Bank of England said in London today. The median forecast in a Bloomberg News survey of 24 economists was 79,000. Lending on personal loans and overdrafts fell to 265 million pounds ($530 million), the least in 15 years.

Banks are tightening credit standards after contagion from the U.S. subprime mortgage market collapse, the Financial Services Authority said yesterday. Less access to credit for Britons with record debt may further slow consumer spending and a weakening housing market, adding to the case for an interest rate reduction by the Bank of England as soon as next week.

“The household sector was clearly under some kind of pressure at the end of 2007,” James Shugg, an economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. “The U.K. housing market is embarking on a much slower growth period.” He predicted further interest rate reductions after a quarter-point cut last month.

In a separate statement, Prime Minister Gordon Brown reappointed central bank Governor Mervyn King to serve another five-year term. King accepted the position, saying in a statement that he looks “forward to working hard with my bank and MPC colleagues on the economic and financial challenges that face us all.”

Consumer Credit
The central bank’s report today showed consumers borrowed less on unsecured credit as they faced repaying a record 1.4 trillion pounds in debt and banks curbed lending to them. Net consumer credit fell to 557 million pounds in December, less than half the previous month’s total.

“A significant minority of consumers could experience financial problems because of their high levels of borrowing,” the FSA, the U.K.’s financial regulator, said in its risk outlook report yesterday. “A growing number of consumers are likely to experience debt repayment problems in 2008.”

The average cost for a fixed-rate mortgage maturing in the next 12 months and switching to a variable rate will rise by about 210 pounds per month, creating a “serious impact on the affordability of the loan,” the FSA said. The increase will affect about 1.4 million home loans.

Subprime Losses
Britons face higher home loan costs after banks around the world posted at least $133 billion in losses from the collapse of the U.S. subprime mortgage market.

The average rate offered by lenders on a mortgage for 95 percent of the price of a property, fixed for 24 months, rose to 6.53 percent in December from 6.44 percent, the central bank said Jan. 10. The central bank’s credit conditions survey showed banks plan to limit access to all debt in the first quarter.

“There is a risk that some consumers could find it difficult to meet their credit commitments due to tighter lending standards for both secured and unsecured credit,” the FSA said.

All 30 economists in a Bloomberg News survey forecast the Bank of England will cut interest rates a quarter point to 5.25 percent on Feb. 7 as growth slows and the housing market stalls.

U.K. retail sales rose at the slowest pace in 14 months in January, the Confederation of British Industry said yesterday.

House prices fell for a fourth month in January, Hometrack Ltd. said Jan. 28. U.K. real estate professionals said December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, according to a Jan. 16. report by the Royal Institution of Chartered Surveyors.