LONDON—The financial market crisis is not over, Bank of England Governor Mervyn King warned on Tuesday, as yet more data pointed to Britain's housing market and wider economy suffering a long and serious downturn.
But the central bank chief had few words to soothe interest rate markets which are now pricing in a series of interest rate increases this year, as already high inflation is expected to climb further because of soaring commodity prices.
Economists say higher rates probably remain a long way off as a rise now would sap consumer confidence further. An opinion poll on Tuesday showed Prime Minister Gordon Brown's Labour Party trailing the opposition Conservatives by 20 points.
"We still expect the ultimate next move in interest rates to be down given likely extended very weak economic activity and housing market woes," said Howard Archer of Global Insight.
King offered no clues on the rate outlook. "We are now facing a period of rising inflation and falling economic growth. Part of the reason for this change of economic weather is that we are passing through the most prolonged period of financial turmoil that most of us can remember," he said.
"Whether, as the IMF has argued, it is the worst period of financial stress since the 1930s is too early to judge. After all, the crisis not yet over."
A survey by the Royal Institution of Chartered Surveyors published on Tuesday showed house prices are falling at rates not seen in at least 30 years. Manufacturing output nudged higher in April, according to official data.
The only bright spot was a British Retail Consortium Survey showing consumers splashed out on clothes and food in May, encouraged by warm weather.
Retail Gloom
Within a 1.9 percent increase in annual sales reported by the BRC, however, was a weak performance by sectors associated with the housing market. That was the same message from Britain's biggest retailer, Tesco, on Tuesday.
"Clearly the consumer is being squeezed and being very cautious," said the supermarket group's finance and strategy director Andrew Higginson. "(Sales of) some of the big-ticket items like furniture are a bit slower than we would have liked."
Still, the BRC results show that while consumers may be feeling the pinch from higher energy and supermarket bills they are still prepared to spend when the mood takes them.
Alliance Boots, Britain's biggest pharmacy chain, reported a big rise in profits on Tuesday, partly thanks to strong sales of of its popular No7 cosmetics line.
A weakening job market, however, may finally put an end to Britons' free-spending ways as consumers have already racked up more than a trillion pounds of debt.
Official figures on Wednesday are expected to show another rise in unemployment. A turn in the labour market could also spell disaster for hundreds of thousands of people who are expected to fall into negative equity, by finding their mortgage debt exceeds the value of their homes.
Many analysts now forecast house price falls of 20 to 25 percent. Finance minister Alistair Darling is due to meet mortgage lenders later on Tuesday to discuss the state of the market and steps to help existing and prospective homeowners.
Expectations of rising rates are not helping, however. Two-year swap rates, off which lenders price many fixed-rate mortgages, posted their biggest jump on Monday since Black Wednesday, Sept 16, 1992, when the pound was thrown out of the European Exchange Mechanism.
"This is likely to feed through to further sizeable rises in fixed mortgage rates in the next few weeks, while tracker rates also may rise further as lenders seek to reprice credit risk amidst the plunge in house prices and deterioration in economic prospects," said Michael Saunders, economist at Citigroup.
"All this adds to the likelihood of a long period of economic weakness."
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