THE Bank of England put on the robes of the grim reaper last week when it delivered a gloomy assessment of the outlook for the UK economy over the coming year.
Governor Mervyn King warned that we could be heading into a recession, with at best zero growth. Food, energy and import prices will continue to rise, pushing the Government's favourite measure of inflation, the Consumer Prices Index, over 5% and pos
sibly above 6%. The Retail Prices Index, which includes an element of housing costs and is already at 5%, will also climb.
So is there nothing for consumers to look forward to for the next 12 months? Scotland on Sunday decided it was time to go hunting for reasons to be cheerful.
Jobs There was more bad news on the jobs front, with unemployment in the UK increasing by 60,000, or 0.2%. Yet Scotland is bucking this trend with the second highest level of employment after Northern Ireland.
While jobless numbers rose by 82,000 in England, representing 5.5% of the workforce, compared with the previous three months; they fell by 12,000 in Scotland, where just 4.2% of the population is now unemployed.
Prices and mortgage bills Although the Governor's prognosis is for a dire time over the next few months, he believes the slowdown in the economy will force firms to cut their prices next year, triggering a sharp fall in inflation to 2% or even lower by 2010. This should allow banks to cut mortgage and other borrowing costs, giving consumers cause to crack open the champagne.
The key message for homebuyers under pressure, therefore, is to hold on in there if possible, because things will get better and the Bank is doing everything it can to avoid more financial pain in the form of higher interest rates.
The silver lining in his statement was that banks were encouraged that rate rises are behind us, allowing some lenders to cut interest rates. C&G, for example, amended its entire range and trimmed fixed mortgage costs. Its two-year fixes now start at 5.95% with a 40% deposit and a £1,999 fee, rising to 6.55% with a 10% deposit and a £999 fee.
Woolwich also reduced its fixed loans to 5.99% over two years and 5.97% over three years, with a 40% deposit and £995 fee. The bank doesn't offer 90% mortgages but you can fix for three years at 6.57% with a 20% deposit and £995 fee.
On Friday HBOS announced it was trimming its loans available via brokers. You can fix for two years at 5.84% (down from 6.19%) with a 25% deposit with a £999 fee, or 6.04% for three years with a £499 fee.
The bank has also introduced a range of fee-free loans including a three-year tracker at 6.19% with a 40% deposit, and a two-year fix at 6.39%, again with a 40% deposit.
Cumberland, Newcastle, Scarborough and Progressive building societies also cut their rates last week.
But given the prediction that rates will fall sharply, homebuyers should give serious consideration to a tracker rather than a fixed loan.
The Woolwich has an attractive lifetime tracker at 0.69% above base rate, currently giving a pay rate of 5.69% with a £995 fee, if you have a 40% deposit.
Nationwide and C&G both have competitive 'drop-lock' trackers worth considering. These allow borrowers to track the base rate until it reaches a point when they want to fix.
But remember there is always the risk, despite the Governor's best intentions, that future interest rate rises cannot be avoided, particularly if inflation turns out to be more stubborn than expected.
House prices Inflation works a dark magic on property by eroding mortgage debt more quickly than when prices are flat. So in real terms a £100,000 home loan is eroded by 5% inflation to £95,000. True, this is normally because wages rise to keep pace with inflation, and wage rounds have been restrained so far. However, over time inflation can ease a mortgage burden because you pay off yesterday's devalued debt using tomorrow's earnings.
Similarly, inflation can mask the impact of falling house prices. Although UK values are down roughly 10%, if set against inflation this would mean the true value of property falls to date is more realistically 15%. Confidence would have been hit more severely had this been the headline rate attached to sharper price collapses.
Scottish house prices have held up better, sliding just over 2% during the year, according to the Halifax. But this would have been nearer 7% if inflation had been added into the equation.
Savings High inflation is a disaster for most savers as it quickly eats into their nest egg. But it has the advantage of keeping interest rates high, allowing smart savers to profit.
People who rely on their savings to live can find their income collapses when interest rates are cut sharply.
To make sure your nest egg isn't being smashed, basic rate taxpayers will need to earn at least 5.5% to stay ahead of CPI after paying tax, and 6.25% to beat RPI. Higher rate taxpayers will fall behind RPI if they earn less than 7.3% on their savings.
The good news is there are accounts available to help. First of all, make sure you are maximising your tax-free Isa allowance, thereby paying as little tax as possible. The bad news is that rates look set to fall, possibly breathtakingly during the next couple of years, which could cut your returns by half or more.
If you have money you can tie up, now is a good time to fix. Given the expectation that interest rates will start to fall next year, the Post Office has a one-year bond at 7.05%. National Counties Building Society will fix your cash for a year at 7.11%, and you can also still fix a minimum of £1,000 at 7.01% with Cahoot.
The best instant access accounts include Bradford & Bingley's 6.51% and Intelligent Finance's 6.4%, with Anglo Irish paying the same rate.
While inflation has been high the steal of a deal has been National Savings' tax-free index-linked certificates, paying 1% over RPI. Right now this is worth a return from an equivalent bank or building society account of 7.5% to a basic taxpayer, or 10% to higher earners.
However, you have to lock into these for three or five years, and if the Governor is right and inflation falls to 2% or below, they might not look such a hot tip in 18 months' time.
Even so, given that you can withdraw your money after two years without penalty, they may still be worth a whirl.
My money is fighting inflationFOR grandmother Muriel Wyness, of Aberdeen, saving is a top priority, so she shops around for the best rates to protect her savings against inflation, writes Teresa Hunter.
She has been hit by rising prices, particularly fuel bills, but living on her own and with her family having grown up, the soaring price of food is not such a concern for her.
However, she is very worried about her retirement and knows she must put away as much as she can each month.
Muriel, who works on special projects for the council, says: "Pensions are a big problem for women of my age. I started work when I was 19 but didn't start saving for a pension until I hit my 40s.
"Women just didn't have a pension in those days, but now everything has changed and I do feel angry that the goalposts have moved through no fault of my own.
"I'm doing the best I can, but it is hard."
Nevertheless, she saves as hard as she can, putting the maximum possible in cash and share Isas on top of her regular pension contributions.
The rest goes into an instant access savings account. She chose a Birmingham Midshires account, currently paying 6.33%.
