The Bank of England is treading a wavering tightrope – will it cut the base-rate from the present 2% to the lowest level ever seen of 1% today?

The balancing act the Bank is juggling here is split between avoiding the UK economy going into a deflationary period and putting further pressure on an already weak pound. The Euro is trading at around €1.10 to the pound having recovered from a low of under €1.05.

The Bank of England might well drop the rate to 1.5% instead of the full 1% cut and we will see later whether this is the case.

The US Federal Reserve surprised analysts when they cut rates to 0.25% instead of the predicted 0.5% and as a result the US Dollar fell against other currencies.

It could be possible to see these low rates in the UK as well, with the Bank of England cutting rates to 2% earlier this month and considering cutting them further in the minutes of that same meeting. It will be interesting to see where rates will go next and I will certainly be looking on with interest at next months Bank of England meeting.

Inflation in the US saw a record fall of 1.7% bringing the rate down to 1.1%, which has lead the US Fed to cut the interest rate to this all time low. The inflation in the UK is much higher than in the US still sitting at over 4%, but the rate is expected to fall to similar levels as that of America and consequently, our interest rates could fall to similar low levels too.

The administrators of Woolworths have confirmed that all their stores will be closed by 5 January 2009, which is one of the casualties of the present economic crisis. If no part of the business can be sold to the still interested parties, this will add a further 30,000 jobless to the ever increasing unemployment list. The jobless total, which is expected to rise, will in itself continue the downward pressure on the UK market and on inflation giving the Bank of England even more reason to cut rates further.

However, it is worrying and what we don’t want to see is a long period of deflation, which is what Japan saw for a long period. Japan suffered greatly as a result of this deflationary period and their property market took a hit of some 60-75% hit. Property in the UK and across the pond in America has dropped dramatically and is continuing to fall. With interest rates at such low levels, which is where interest rate fell to in Japan, there is the real worry that both the UK and America will go into a deflationary period.

It’s official, UK inflation is falling and in October the rate fell to 4.5% having hit 5.2% in October.

We have seen that oil prices have been falling dramatically, with Nymex Crude sitting at just over $52 a barrel despite Opec reducing production to try to keep the price high. The fall in oil price has been filtering through to the economy lowering transport costs and with food prices falling too inflation has fallen.

There is however talk about the possibility of “deflation”, however, this is probably a bit premature with inflation still about 4%. The Bank of England has hinted at further interest rate cuts and there is a possibility that rates could fall to 2% by early next year.

The UK is not the only country with falling inflation and lower consumer confidence, the US has seen record falls in consumer prices when it dropped by 1% in October. This compares to a lower than expected fall in the UK where retail sales fell by just 0.1% in October, which is lower than the expected 1%. Retailers are having a hard time and are competing by discounting their prices!

The latest slow-down figures have again hit world stock markets with the Dow Jones falling by just over 5% and Japan’s Nikkei falling by just under 6.9%! The London FTSE is presently trading with a fall of just over 2%.

Better news for the property market

According to the Council of Mortgage Lenders (CML) mortgages in October picked up slightly, up by 7% over September.

“CML data shows that gross mortgage lending totalled an estimated £18.7 billion in October, almost 7% higher than what was an admittedly weak £17.5 billion lent in September. The monthly total was 44% lower than gross mortgage lending of £33.4 billion in October 2007″ Per the CML