House prices facing 15% fall, says IMF

It warned Britain has 'little scope' to ease the slowdown by cutting interest rates because of runaway inflation.

The Washington-based IMF, which is responsible for overseeing the global financial system, delivered its grim prognosis in its latest annual economic health check.

Gloom: The International Monetary Fund is predicting a double-digit fall in house prices over the next two years

It cut growth forecasts to 1.4 per cent this year, down from 1.8 per cent previously.

The IMF's deputy director, Ajai Chopra, warned that the UK stands on the precipice of a recession - two quarters of negative growth.

'We do not have a negative number for growth forecast in the coming quarters, but it doesn't take much of a shock to see it turn negative,' Mr Chopra added.

The IMF report will make grim reading for Gordon Brown, who is working on an autumn economic package to kick-start the housing market and relieve the pressure on households struggling with soaring bills for energy, food and mortgage repayments.

The Bank of England - which publishes its latest interest rate decision today - is determined to keep a lid on the rising prices.

The annual inflation rate rose to 3.8 per cent in June  -  almost twice the Bank's target of two per cent.

Interest rates are at five per cent - the highest among the Group of Seven industrial nations.

The IMF's pessimistic growth rate is below Alistair Darling's current 1.75 to 2.25 per cent forecast.

And there was worse to come, as the IMF said the economy will weaken again next year, with growth for 2009 cut to 1.1 per cent.

This is sharply down from the 1.7 per cent the IMF predicted in the spring, and well below the Chancellor's forecast of 2.25 to 2.75 per cent.

On housing, the IMF said: 'The central scenario assumes a cumulative decline in house prices of about 15 per cent over two years rather than a precipitous correction.'

The IMF believes that rising costs will help to push inflation to a peak of five per cent by the end of this year, before starting to creep back down towards two per cent target by 2010.

Most City experts predict interest rates will be held at five per cent today, but will be cut next year.

Jonathan Loynes, of Capital Economics, said: 'If you are going to see a rate change in the next few months, it will probably be more up than down.

'But we think rates will fall a long way next year, to 3.5 per cent.

'If we really are heading for a recession then they (the Bank) will have to move pretty fast to get rates down to get the economy going again.'