The days of lower interest rates are numbered.  The inflation beast has been ignored too long and it is going on a rampage.

The booming markets such as China and India are suffering under high inflation the most.  China’s inflation rate is maintaining levels at more than 8 per cent.

And despite the US data yesterday showing that inflation was rising slower than expected, the country is in a period of sharp economic downturn when inflation rates are expected to be under downward pressure.

The upward pressure on inflation is a worldwide phenomenon which could end the era of low interest rates.

In Japan the inflation rate is continuing to push up to levels that could cause a inflationary crisis.

Many economies are starting to question if interest rate management is an effective tool in the fight against inflation.  Considering that small changes have a strong and immediate impact on households with debt but such a delayed and relatively minimal impact on inflation. 

Inflation seems to be moving independently of other economic activity, and the question that many governments are asking their central banks is short of price fixing and wage freezing is there a more effective way of reducing inflation in the economy.

It is a question that may need answering as the Bank of England warns that inflation pressure continues to rise because of the cost of food and energy.

Early this week the UK central bank governor, Mervyn King, said slow growth and rising inflation requires delicate balance from the central bank.

“The monetary policy committee is facing its most difficult challenge yet,” Mr King said.

“We are traveling along a bumpy road as the economy rebalances,” he said.

“The worst is over.”  It is a cry coming out of the US at the moment as mortgage data shows signs of support, consumer spending is up and the employment rate improves.

Many people are now asking if the slowdown was really all that bad.

True, there has been a credit crisis and the financials have been hit hard, but other sectors such as IT and energy have held up in the face of the slowdown.

IT is usually the first to suffer any loss in business confidence as businesses scale back spending in that area. Yet revenue of most IT companies is maintaining strength.

Energy prices also dive because of diminished demand, but oil hit records this week.

Finally there is the US growth; technically two quarters of negative growth constitutes a recession.

The US is yet to register one period of negative growth in this latest slowdown.

Will it happen? Probably not…the US Federal Reserve’s emergency relief will filter through the market sooner rather than late.

There might be one quarter of contraction but not two.

This might not be the best news for the UK with energy prices coming under further pressure and a central bank looking over its shoulder at rising inflation.

We might have a consumer driven recovery so interest rates will most likely be under pressure for some time yet.

While the financial world waits for the latest move from the Federal Reserve Bank, it might be a good time to consider the implications for homeowners in the UK.

The fact is that any change in interest rates in the US will have little direct affect on UK homeowners.

It will be the rhetoric surrounding the announcement, which will be closely monitored to find hints as to the health of the US economy.  There is no doubt that the state of the US economy affects every other economy around the globe.

Most of the central banks do a similar dance around monetary policy, but they are all dancing to a different beat.

The US has been lowering interest rates since September last year, the UK started reducing closer to Christmas, while some other central banks such as in Australia have increased their base rate to curb inflation.

When central banks decided to uniting to reduce the impact of the sub-prime crisis it made front-page news around the world.

The banks agreeing to move in the same direction is big news, and not something us investors would expect every day.

Central banks can only create and change policy according to real figures sourced from the domestic economy.

Bankers need evidence and justification for change, if they make changes without the evidence to back it up then hard questions will be asked.

By paying attention to the CPI, employment rates and GDP an investor can have a pretty clear picture of the way interest rates are headed.

It might be weak but the UK has experienced economic growth in the first three months of 2008.

Despite the economic slowdown and low consumer confidence the Office of National Statistics has reported that the UK economy grew by 0.4 per cent in the first three months.

The growth was reported in analysing the gross domestic product for the first quarter.

The growth is lower than what was expected by analysts, but GDP is still growing rather than contracting. Many expected the slowdown to be so steep that it would result in negative GDP in the first quarter.

The strength came from the service sector that grew by 0.6 per cent in the quarter. The biggest percentage decline was in mining and quarrying, which fell by 5.2 per cent.

There is a chance that the UK might just avoid a recession, and the lower growth might give the Bank of England the confidence to lower interest rates again next month to keep the balance sheet in the black.

The bank expects this slowdown to have a negative effect on inflation; it has yet to come to fruition with high food and energy prices maintaining pressure on prices.

Do we need a retraction in the economy before inflation starts to slide?

Maybe, but is it really worth the risk.

The smart money is on the Bank of England maintaining the base rate at its current levels, and wait to see if market weakness can reduce the inflation rate.

As we have seen in the last year or so, the market has more impact on inflation than any action by the Bank of England.

Chancellor Alistair Darling wants banks to help easy the credit crunch by passing on rate cuts, but banks will try to resist any weakness to their bottom line.

Historically banks have always been held up as institutions and safe sharemarket investments.

They were a safe haven and immune from financial trouble as they controlled the money. But if this credit crunch has proved anything it is that banks are like any other business.

They are exposed to slowdowns and credit troubles, not only does it increase the levels of bad debt on their book, but it also increases cost with credit markets tightening.

Need we be reminded of the long lines of customers abandoning Northern Rock late last year?

With these conditions there is growing economic pressure not to reduce interest rates to maintain profit margins, even with the base rate in decline.

Darling’s ‘request’ for relief for customers from the banks, will hold little weight with the banks that are seeing their ledgers drained.

Some banks have reduced their interest rate after the Bank of England reduced the interest rate by 0.25 per cent, from 5.25 per cent down to 5 per cent.

But the cost to homebuyers wanting to establish a mortgage has risen, it is the case of giving with one hand and taking with the other.

Darling comments were definitely a warning to banks, after also mentioning the rescue money that the Bank of England and the HM Treasury supplied to stressed banks and financial institutions was a show of goodwill from the government.

But these words are falling on deaf ears as all the attention turns to the US market that shows all the signs of being in a recession, and the banks asking each other how bad this slowdown will hit.

It’s official. The Bank of England and those with control over the purse strings are more concerned about the global economic slowdown than rising inflation.

Earlier this week the Bank of England reduced the interest base rate by 0.25 per cent, from 5.25 to 5 per cent.

This is the third rate reduction in a row, and it is a clear message to the market that central bankers are more concerned about the economic slowdown than increasing inflation.

The central bank expects economic growth in Britain to be around 1.5 to 1.75 per cent, but given the brakes that are currently influencing the economy many commentators believe the bank’s growth estimate is optimistic and a recession is unavoidable.

The central bank believes that a weak economy will put breaks on inflation, and the reduction in interest rates will not contribute to inflationary pressure.

“Even if commodity prices remain at their current high levels, inflation should fall back,” a statement released by the bank stated.

“But to ensure that inflation meets the 2% target in the medium term, the Committee needs to balance two risks.”

Only time will tell if the balance will pay off.

The current environment of record commodity prices and rising inflation (2.5 per cent), with a rapidly cooling economy and tight credit markets is putting up new challenges for economists.

How they deal with these market conditions could re-write the rule book on economic management.

The US is already looking at inventive ways to calm the market, and bring balance back to the economy.

Halifax, the UK’s largest mortgage lender, has turned its attention to borrowers with significant deposits.

To draw in this market Halifax is offering discount rates for borrows with capital.  The best rate is reserved for borrowers with 25 per cent or more of the property value.

For struggling first-home buyers looking to get into the market with low deposits, there are even tighter rules which attracts a higher interest rate.

It was not unexpected, with a tight liquidity market and greater value put on low-risk borrowers, there is a growing trend for lenders to look at the quality of their loan books rather than quantity.

Halifax’s new mortgage packages is only one example of how the credit crisis gripping the global markets will affect the UK credit market in the long term.

In the short term these new lending packages will contribute to a slowdown in mortgage approvals and overall housing market weakness.

However in the long term the tougher credit rules will strengthen the credit market and bring renewed confidence to the domestic economy.

The question is who has to hurt now, for a brighter economic future. The answer seems to be struggling homeowners who are already sailing hard into the wind of high household debt and raising costs, and renters who are facing higher rents and major hurdles to buy into the housing market.

These two large groups are usually the first to suffer in any period of economic slowdown.

Sub prime is a buzzword at the moment, and the way things are going it will soon earn an entry into the Oxford dictionary.

The meaning could be twofold: (n.) loans given with little or no security from the borrower, or (adj.) the description given to an economy suffering from poor management and slack lending standards.

Sub-prime the adjective is headlining the business pages at the moment.

It was used by BBC recently when reporting another write-down by Swiss financial group UBS.

UBS also announced that the chairman Marcel Ospel has stepped down in light of these latest write-offs.

There are financial companies out there with falling stock prices due to the “sub-prime crisis”, but have strong management and well-maintained balance sheets.

These companies will be the market darlings after the dust settles and the crisis is over.

But, now could be the right time to re-enter the market and pick up some of the stock on the cheap.

A word of warning however, it is important for any investor to do their homework, ask questions and make educated decisions.

Analysts and investors are concerned that, despite financial institutions writing off billions of pounds in the last quarter 2007 and this latest quarter, there is still billions unaccounted for as more borrowers struggle with their loans.

There may be a few more big institutions to fall yet, but you can be sure there are many companies out there with the right checks and balances in place to weather the storm.

Britain’s housing prices are down again but still up for the full year, according to one of UK’s leading credit society.

Nationwide has announced that housing price have fallen in March by 0.6 per cent, it is the fifth consecutive loss and extends the loss of 0.5 per cent recorded in February.

Property prices are still up for the full year by 1.1 per cent the lowest growth in 12 years.

“However, prices are still 11 per cent higher than two years ago and 47 per cent higher than five years ago,” said Nationwide’s chief economist Fionnuala Earley.

The major concern about these figures is that housing prices are continuing to deteriorate at a stronger pace.

While it is not as dramatic as the double digit falls seen in the US, the US example shows that a reduction in house prices can have a dramatic effect on the wider economy.

Housing price is one economic indicator that many analysts look at when gauging Britain’s long-term economy health.

It is an important indicator because for many people their homes are their biggest investment and deterioration in price is a reduction in household wealth.

If housing prices do not recover then Britain, like the US, may face a more severe slowdown in economic growth that affects more homeowners in the UK.

Everyone is feeling the bite of a slowing economy; even banks are finding it tough as funds start to dry up.

According to the Council of Mortgage Lenders (CML) gross lending declined in February to £24 billion from £25.6 billion in January.

This has led many lenders to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending capacity,” CML direct general Michael Coogan said.

Banks are facing higher interest rates to fund their own loan book.

This cost is passed on to the customer.  This begs the question, what influence does the Treasury have against the raging tide of the free market?

The answer is not much.

A bank is like any other business, it must pass costs to its customers to maintain profitability. A bank that doesn’t will suffer in the current economic climate of low consumer confidence and high borrowing costs.

We are seeing the effect of high borrowing costs in other countries. In the US the Reserve Bank is lowering the interest rate but banks cannot follow suit and offer customers the same savings because of the cost of borrowing.

To combat this problem the Reserve Bank is offering cash to US banks to help sure-up their balance sheets.

Central banks are being marginalized by the power of the free market.

So this raises another question. Will higher base rates from the Bank of England help curb the inflation rate? Only time will tell…