“Things could go wrong, however. The Federal Reserve’s ability to cut interest rates further hinges on US inflation remaining under control. So far, the signs here are good – and we, like most forecasters, don’t expect inflation to be a problem in the immediate future. But it is discomforting for the health of the world economy to be dependent on such an assumption, however well-based.
“And another, more immediate problem, is that the underlying health of the US economy now looks a little less certain. Recent news from the US housing market has been disappointing, and the poor performance of this sector may now not just be helping an overheated US economy to cool off a bit, and threatens instead to precipitate an overall slowdown
“In the UK, the Bank of England’s reluctance to cut interest rates illustrates the dilemmas involved in shifting monetary policy. Recent UK consumer price data suggests that inflation is under control. Worries about the knock-on effects of a US slowdown, and a possible slowdown in the UK housing market, also makes the Bank of England’s stance look increasingly restrictive. But it is possible that the Bank of England will want to see some more broad-based evidence that the economy is slowing, before it takes its foot off the brake and cuts rates. We expect this will happen, with UK interest rates easing somewhat in 2008 – assuming no bad news on inflation.”