MPC 'faces testing times'


MPC 'faces testing times'
UK interest rate decision makers are facing "testing times", a member of the Bank of England's monetary policy committee (MPC) revealed today, as the credit crunch remains a risk.

Bank of England deputy governor Sir John Gieve told the London Chamber of Commerce and Industry today: "These are testing times for the MPC."

He explained the UK economy recorded strong growth in the third quarter of 2007, but indicators show it slowing "in part because of the rises in interest rates last year".

Sir John said there was now a case for cutting rates because of the credit crunch.

"The case for easing [of monetary policy] has been greatly strengthened by the disruption in global credit markets and in our own banking system which brings a risk of a deeper downturn," he told the audience.

However, he highlighted rises in global oil and food prices, amplified by the falling pound, which meant inflation remained a risk.

"These [food and oil prices] are likely to raise our inflation rate well above target in the coming months at a time when short term inflation expectations remain uncomfortably high.

"This combination of upside and downside risks complicates our task of keeping inflation on track to meet the two per cent target."

The consumer prices index (CPI) measure of inflation now stands at 2.1 per cent.

Sir John also said the credit crunch, caused by inter-bank lending rates rising, still remained a threat, despite markets calming.

"It is too early to declare the problem solved. The longer term bank funding markets remain relatively illiquid, many securitisation markets remain effectively closed, and general market sentiment remains fragile," he said.

"Only a part of the total losses on subprime have yet been declared... The subprime chapter will not be closed for some months yet and there are still risks of re-ignition of the acute money market conditions we saw last month."

Sir John also blamed the banks for the credit crunch.

"Banks have lent too much and too cheaply at the top of the cycle and have then suffered from defaults when policy tightened and unemployment and failures increased."

The deputy governor concluded: "We have experienced a major financial shock that has reverberated through the banking sector in all the advanced economies.

"It has calmed recently, but we should expect a prolonged period of discomfort for individual banks and the financial system as a whole."

Commenting on the speech, Howard Archer at Global Insight, said: "Sir John's speech makes clear that the Bank of England cannot afford to take its eye off the inflation ball.

"He is clearly concerned the disruption in global credit markets and in the UK banking system markedly increases the risk that the UK economy could suffer a deep and extended downturn."

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