UK's economy is experiencing slower growth as during 2007, it recorded a real GDP growth of 3.1% however, and the same has been recorded at 1.0% due to sharp increase in inflation. (Economist.com 2008). UK's inflation touched 3.8% in 2008 whereas its budget balance also widened to negative 3.8% suggesting the fact that all is not well for the UK economy.
Many critics believed that in order to arrest the rising inflationary trends in the country, the monetary authorities in the country shall increase interest rates whereas some believed that in order to reduce the impact of recession, UK's monetary authorities shall lower interest rates so that economy can be put on right track.
This paper will discuss both the options i.e. increasing or decreasing the interest rates to control inflation or avoid recession and will present a comprehensive analysis of both the options in order to provide a conclusive recommendation of which option to exercise.
The economy of UK is second largest economy in EU after Germany and fifth largest economy in the world. ...
The key economic indicators suggested improvement as UK economy thrived on increasing consumer spending however, due to increasing spending; UK economy witnessed growing increase in its consumer price index.
IMF, during 2007, revised its economic forecasts for the UK economy due to its improved performance and termed it "impressive" as during last five years i.e. 2003 to 2007, it recorded an average real growth rate of 2.8%. (BBC.com 2007). The economic growth however is mostly dominated by the service sector with major contribution being made by financial services, food chains, healthcare as well as real estate. Further, the Agriculture sector is also significantly contributing towards the GDP of the country as it meets almost 60% food demand of the country. (Economywatch.com 2008)
It is also however important to note that the performance of GBP Pound sterling is also declining over the past few years, mainly due to strong performance of Euro against major currencies and the fact that most of the trade within EU region is dominated by Euro.
The recent developments, especially in the later half of the year 2008 however suggest that all is not well with UK's economy as it is experiencing serious challenges ahead due to the spread of subprime mortgage crises originating from US.
The housing sector in UK thrived on the loose regulatory environment which allowed lenders to make lending into areas which were not considered as bankable under normal circumstances. UK also experienced the same economic bubble in its housing sector as not only the prices of the housing units dramatically increased but also the overall flow of credit to the housing sector increased too. This not only made bankers