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November 1, 2007

BoE economist warns of potential slowdown

by Gill Montia

Story link: BoE economist warns of potential slowdown

The impact of the US sub-prime mortgage crisis and the consequent credit squeeze are far from over.

Charlie Bean, the Bank of England economist, has warned that events such as those which caused the run on Northern Rock could still cause significant damage to the UK economy.

He described the current situation as one where it is “possible to envisage a sequence of events that generate a greater or more prolonged contractionary impact”.

Whilst he conceded that the UK economy is starting out from a strong position, Mr Bean explained that the crisis in the US property market has prompted global banks to exercise caution in their lending, and that this has fuelled fears of a global slowdown.

The credit squeeze is already having an impact on UK consumers, who have to save more and borrow less. This in its turn will lead to a slower economy.

The housing market is particularly vulnerable as mortgages become more expensive and lenders tighten their criteria and reduce their range of products.

At the same time inflationary pressures such as the oil price ($94 a barrel) and the rising price of food, remain an immediate concern.

The Bank of England’s target for inflation is 2% and if it threatens to rise above that level the bank could respond by increasing the base rate.

 

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