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Stagnant UK economy complicates interest rate decision

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Stagnant UK economy complicates interest rate decision

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The Bank of England has begun a difficult two-day interest rate meeting as the British economy has almost ground to a halt and consumer confidence there slumped. A new survey by the UK’s largest building society found that consumer confidence suffered its biggest ever percentage fall in July in the wake of higher food and energy costs and mounting talk of a recession.

The British economy grew by just 0.2% in the three months to June according to the National Institute of Economic and Social Research. Inflation is running at an annual rate of 3.8% and the jobless rate has reached is 5.2% of the working population. The housing market – which has driven the economy in recent years – is under immense pressure. Numerous surveys have shown large monthly drops in house prices and record low mortgage approvals.

The only way that can be turned around is with lower interest rates, but there is little chance of UK central bank Governor Mervyn King and his policymakers doing that. If the Bank of England were to reduce the cost of borrowing it could mean that inflation stays too high for too long. On the other hand, raising rates to tackle the inflation threat could drive Britain into a nasty downturn. The expectation therefore is the bank will leave rates unchanged.