The Bank of England face a dilemma over the future of interest rates in the economy.

On the one hand the slowdown in the Housing market could lead to a wider economic slow and possible recession. On the over hand inflationary pressures are actually rising, due to a variety of cost push factors. If the bank responded by cutting interest rates, they would risk increasing inflation above the governments target of 1 -3%. This could turn the temporary cost push factors into persistant and continuous inflation; it would raise inflationary expectations and lead to higher interest rates in the long term.

However, with house prices falling and interbank lending increasing, there is also pressure for the Bank to cut rates. It looks likely that the housing downturn will get worse before it improves. If house prices were to fall by 20-25% then it would significantly affect consumer confidence and consumer spending. The UK economy has relied quite heavily on consumer spending in the past. A fall of this magnitude would definitely slow the economy.

It may come down to the question of whether they think their highest priority should be low inflation or low unemployment.

However, I think the problems in the housing market and global economy are sufficiently problematic to warrant a cut in rates. I would predict a fall of 0.5% in the next 6 months.