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City economists are forecasting that 2008 will see three interest rate cuts. The Bank of England’s quarterly inflation report showed that the Bank was becoming more concerned about the potential slowdown in the UK economy following upheaval in the world’s financial markets.

Any cut in interest rates would potentially bring welcome relief to millions of borrowers who have struggled to keep up with increasing payments since the interest rate went up from 4.5% in August 2006 to 5.75% in July 2007. Millions still face up to 40% increases in their repayments when they come off two-year fixed rate deals in the next few months. Three cuts in 2008 would bring the interest rate down to 5%, and mortgage rates should start coming down as a result.

Bank Governor Mervyn King admitted that there was a risk of a ‘bigger downturn’ than might have been expected due to the global credit crunch that had its roots in the US sub-prime mortgage crisis in summer.

Conclusions in the City were that the Bank hoped to cut interest rates as soon as possible in 2008, and may well continue to fall in 2009. The popular forecast is that a 0.25% cut will come as early as February.

Nevertheless the forecasts came with a note of caution, as official economic data will influence future decisions. GDP growth forecasts for 2008 have been downgraded to 2.2% as factors such as the five interest rate rises, the strong pound and financial market uncertainty have eroded consumer confidence.

Mr King said that the economy would overcome the knock confidence has taken from the run on Northern Rock with inflation expected to return to target. Unemployment figures indicated that the economy has not yet been badly damaged by the credit crunch. The jobless total was up by only 6,000 in quarter three 2007 to 1.67m, although the unemployment rate remained unchanged at 5.4%.