June 18 (Bloomberg) -- The worst of the stock and credit market declines that began last year is yet to come as inflation accelerates and economic growth falters, according to a Royal Bank of Scotland Group Plc strategist.

Central bankers are ``in a dangerous corner'' where the chance of a ``major policy error has just super-spiked,'' wrote Bob Janjuah, 42, a London-based credit strategist at the U.K.'s second-largest bank. Any stock rally in the next month ``will be the significant opportunity this year to get short stocks,'' he said in a note dated June 11.

The Standard & Poor's 500 Index may plummet 22 percent to 1,050 from current levels, said Janjuah, whose prediction is lower than any from any U.S. equity strategists surveyed by Bloomberg. The cost of protecting bonds from default is likely to soar, pushing the benchmark Markit iTraxx Crossover Index of credit-default swaps on 50 European companies to a record 700 basis points from 473, the note said.

Stocks fell from a record high in the past year as writedowns stemming from the credit turmoil approached $400 billion. That amount may triple to $1.3 trillion, New York-based hedge fund manager John Paulson said today at an investor conference in Monaco.

``Mid-July through to October is likely to be the most bearish period we will experience in the bear market,'' Janjuah wrote. ``Massive negative revisions to growth and stubbornly high inflation'' will lead to ``massive negative revisions to earnings expectations deep into 2009, weaker and weaker credit metrics, higher and higher defaults, and ongoing problems in the financial sector,'' he said.

Inflation Pressures

The S&P 500 index fell 3.5 percent this month after Federal Reserve and European Central Bank policy makers indicated interest rates may need to increase as the threat of inflation intensifies.

ECB President Jean-Claude Trichet said June 5 the bank may raise the euro zone's benchmark rate next month to curb inflation, running at the fastest pace in 16 years. Four days later, Fed Chairman Ben S. Bernanke said policy makers will ``strongly resist'' a surge in inflation expectations.

Janjuah ``is talking about it happening in three months so we don't have to wait very long to see if he's right,'' said Malcolm White, who helps manage about $7 billion in fixed-income assets at Legal & General Investment Management in London. ``Inflation fears will limit central banks' ability to take steps to control the crisis. Corporate defaults are going to increase, it's inevitable.''

Falling Securities

Janjuah predicted in March that the iTraxx Crossover index would climb to 300 basis points from 230 basis points by mid- May. The index began rising in June and reached a high of 461 in July.

Barclays Capital and BNP Paribas SA strategists predict a similar deterioration in credit quality. Puneet Sharma, head of investment-grade credit strategy at Barclays in London, said last week that the iTraxx Crossover index may reach 700 by yearend, and Andrea Cicione, a credit strategist at BNP in London, expects the same level by the end of 2009.

Goldman Sachs Group Inc. strategist David Kostin said the S&P 500 may finish 2008 at 1,380.

In a short sale, traders borrow stock to sell it, on expectations prices will fall. Europe's Dow Jones Stoxx 600 Index dropped 1.5 percent to 301.74 as of 5:12 p.m. in London today. The S&P 500 retreated 0.66 percent to 1,342.21.

The second half of this year will be worse than the first as the economic slowdown continues into 2009, said Paulson, founder of hedge fund Paulson & Co. Signs of stress are ``accelerating'' in the housing market, he said, adding that he's betting on falling securities prices.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

Last Updated: June 18, 2008 12:48 EDT