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Chancellor warns UK economy will suffer more than other countries

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by Kay Mitchell

According to Chancellor of the Exchequer, Alistair Darling, the UK economy is likely to suffer more than its counterparts.

Mr Darling said because of London’s position the major financial services centre of the world, the UK is likely to be more severely affected as a result of the profitability being reduced.

It was revealed today that UK inflation had fallen to 4.1%, however, the new rate is still more than double the Government’s 2% target.

As a result, Mervyn King, the Governor of the Bank of England, has written to the Chancellor to explain the level of inflation.

In his letter, Mr King described the unwillingness of banks to lend to individuals and businesses as the single biggest threat to the UK economy.

The Chancellor has announced he is reducing the fees which the Government charges banks in return for a £250 billion guarantee on their lending.

The scheme is part of the Government’s initiative to ease the currently tight credit conditions.

The Chancellor told Parliament yesterday that despite banks starting to extend their lending, there is still more to be done.

There is speculation that ‘quantitative easing‘ could be implemented, whereby the Treasury would inject funds into the financial system and ease pressure on banks by giving them extra capital.

Quantitative easing was implemented by Japan in the early 1990s, in order to fight off the threat of deflation.

Many analysts believe that inflation in the UK will continue to fall into the New Year with some concerned that it will drop below the 2% target and deflation is a possibility.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

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News posted: December 16, 2008

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