Financial crisis plumbs new depths

The economic news took a backseat over the last month as the financial crisis intensified. The interbank markets froze, a number of banks on both sides of the Atlantic failed and governments stepped in to clean up the mess. Nonetheless, the UK economy appears to be nose-diving into a recession. (See Chart of the Month.) And the further fall in oil prices to below $90 per barrel has all but removed the inflation threat. Accordingly, the MPC now has a free hand to respond to the downturn in activity. We now think that interest rates will fall to 2.5% next year.