Will interest rates fall here too?

Is the world's other major debt-soaked economy with a housing market under pressure also due for rate relief? The Fed's move, along with the run on Northern Rock (see pages 20 and 24), which petered out mid-week, has boosted expectations that the Bank of England will soon lower rates. And September's drop in annual consumer price inflation to 1.8%, the lowest since March last year, appears to give the Bank some leeway.

But not all that much. A further fall in energy inflation was the key reason for the decline, but as Capital Economics points out, unless record oil prices fall soon, energy inflation will pick up sharply over the next few months; higher petrol prices alone could add almost 0.5% to overall inflation. The Retail Price Index, which includes mortgage costs and is used as a basis for pay settlements, is back up to 4.1%, which could fuel concern over the knock-on effects on wages.

Meanwhile, the freeze in interbank lending has pushed up mortgage costs and the price of loans to businesses, casting a cloud over the economic outlook. To alleviate the freeze, Bank of England governor Mervyn King has now resorted to allowing banks to borrow from it for three months using assets including mortgages as collateral, a move he had previously decried as a virtual bail-out of careless banks. This "extraordinary U-turn", as Chris Giles put it in the FT, highlights the extent of the turmoil in the credit and money markets. City analysts are busy trimming their growth forecasts for 2008, with ING expecting a "sharp slowdown in the UK" as GDP growth falls to just 1.7%. As Tom Stevenson warned in The Daily Telegraph, "the worst of all possible worlds would be if the credit crunch spilled over into the real economy but rising prices meant the Bank of England was powerless to do anything about it".

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