LONDON, Sept 25 (Reuters) - The credit squeeze has been more serious than initially expected and the latest escalation of tensions poses downside risks to both the economy and inflation, Bank of England policymaker Kate Barker said on Thursday.
Speaking to business leaders in northwest England, Barker said it was hard to judge what the final scale of the shock to the economy would be, but predicted lending by UK banks would remain constrained for a 'considerable period'.
Talking about the economy, she struck a dovish note.
'The latest developments in financial markets have now increased the downside risks,' she said. 'There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target.'
The collapse of U.S. investment bank Lehman Brothers last week sent shockwaves across financial markets, leading to unprecedented stock market volatility and pushing money markets deeper into gridlock.
'The (BoE) Monetary Policy Committee will clearly be looking hard at the impact of these recent events in our October meeting and as we update our forecasts in November,' she said.
Tough economic challenges did not justify changing the central bank's 2 percent inflation target but it was vital to consider how to use the flexibility provided for in that framework, she said.
Upward pressures on inflation had eased somewhat since the beginning of August but she noted that sterling's recent decline on the foreign exchanges would boost import prices.
Nevertheless, there was little evidence that the recent rise in inflation was feeding into higher wages. 'It may be too soon to dismiss completely the risk of significantly higher wage growth in the wage round early in 2009, although it is now receding as the labour market weakens,' she said.
(Reporting by Christina Fincher; editing by David Stamp) Keywords: BRITAIN BOE/BARKER tf.TFN-Europe_newsdesk@thomsonreuters.com cmr COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
Speaking to business leaders in northwest England, Barker said it was hard to judge what the final scale of the shock to the economy would be, but predicted lending by UK banks would remain constrained for a 'considerable period'.
Talking about the economy, she struck a dovish note.
'The latest developments in financial markets have now increased the downside risks,' she said. 'There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target.'
The collapse of U.S. investment bank Lehman Brothers last week sent shockwaves across financial markets, leading to unprecedented stock market volatility and pushing money markets deeper into gridlock.
'The (BoE) Monetary Policy Committee will clearly be looking hard at the impact of these recent events in our October meeting and as we update our forecasts in November,' she said.
Tough economic challenges did not justify changing the central bank's 2 percent inflation target but it was vital to consider how to use the flexibility provided for in that framework, she said.
Upward pressures on inflation had eased somewhat since the beginning of August but she noted that sterling's recent decline on the foreign exchanges would boost import prices.
Nevertheless, there was little evidence that the recent rise in inflation was feeding into higher wages. 'It may be too soon to dismiss completely the risk of significantly higher wage growth in the wage round early in 2009, although it is now receding as the labour market weakens,' she said.
(Reporting by Christina Fincher; editing by David Stamp) Keywords: BRITAIN BOE/BARKER tf.TFN-Europe_newsdesk@thomsonreuters.com cmr COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
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