LONDON -- The economy is facing its most challenging time since the early 1990s or even earlier as policymakers are grappling with two conflicting risks, Bank of England Deputy Governor Charlie Bean said on Wednesday.
In a written submission to parliament's Treasury Committee in his first week as deputy governor, Bean, the central bank's former chief economist, said it will be hard to get inflation to meet the 2 percent target without needless volatility in output.
"There is no doubt that the UK economy presently faces the most challenging set of circumstances since at least the early 1990s and possibly earlier," he said.
Sterling fell and interest rate futures extended gains after Bean's comments on the perception that he was in no hurry to raise interest rates to bring inflation down.
Bean said policymakers were having to face up to the two competing risks of higher oil prices and the ongoing ructions of the credit crunch.
"We are faced with two substantial shocks of unknown impact and duration: the de-leveraging that is underway in financial markets and the associated tightening in the availability of credit; and the relentless rise in oil and other commodity prices.
"Both these shocks depress activity, but have conflicting effects on inflation."
Bean said there was a risk that falling house prices would hit consumer spending harder than the Bank is now expecting.
"In that case, the slowdown in growth could be even more pronounced and/or be more persistent, leading inflation to undershoot the target in the medium term."
But against that the Monetary Policy Committee had to deal with the risk that higher inflation now—- it hit 3.3 percent in May — lead to a permanent shift upwards of people's expectations of price rises.
Pay growth, so far, had been subdued but there was always the risk that people started getting higher wages.
"If households and businesses start losing faith in the idea that inflation will stay low and round about the target, they start building it into their pay and prices and inflation becomes much more embedded into the system."
He said while it may be a relatively unlikely event, it "is one that worries me personally".
© 2008 Reuters. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
|
