2 million out of work but how much room for manoeuvre does the Bank of England have?

This morning brings more bad news on the economic front on the front page of the papers.The Independent going with the grim prediction from the monetary committee's David Blanchflower
who says that if base rates don't come then we could be looking at 2m on the dole by Christmas.

"People have to start to respond to the fact that we are in a recession and the danger is we'll be in a very serious and long-lasting recession unless we do something. This is a call to action." reports the paper.

Yet its room for manoeuvre may be limited.Most predictions see inflation falling next year which will give the Bank Of England some leeway.But there is another area that needs to be addressed and that is our falling exchange rate against both the Dollar and the Euro.

The weakness comes from the financial communities lack of confidence in the British economy but conversely it is also allowing for a fall in interest rates which means that its returns on sterling will fall.However the double whammy in all this is that the exchange rate will lead to higher inflation as it increases the cost of imported goods.This figure is currently running at over 8% and may well prevent a lowering of rates.

Whatever the outcome,the picture looks gloomy.Yesterday's report on falling house prices suggest that this may be more than the mere correction in the market that many analysts thought was needed.The figures on new mortgages,barely a quarter of what they were last year will lead to job losses not only in construction but also in financial services and estate agents.Both of these have supported the economy during boom times