Global turmoil could damage UK economy: Bank chief

Turmoil in the world financial markets could hit British growth, the Bank of England’s chief economist has warned.

In a 'City of London' speech, Charlie Bean reportedly said events such as the run on Northern Rock had the potential to damage the economy significantly.

It is “possible to envisage a sequence of events that generate a greater or more prolonged contractionary impact,” he was quoted as saying.

But he said it was also possible that impact of the “credit crunch” could also be quite mild.

He said the recent turmoil in financial markets was likely to have “led to a softening in the outlook for growth”, although he pointed out that both the world and UK economies are starting from a “strong position”.

The housing market could be particularly vulnerable as the supply of cheap mortgages reduces and banks become stricter with their lending criteria.

“Though house prices have broadly held up, some of the indicators point to a weaker outlook,” Mr Bean said.

“If equity or property prices were to fall significantly, then that would probably affect both the quantity of credit advanced and its price,” he added.

Mr Bean appeared to play down speculation that the Bank would cut interest rates next week, saying it was still concerned about inflation.

The pound broke the US$2.08 mark as interest rate developments on both sides of the Atlantic drove the currency higher.

Sterling’s latest rise – to a level not seen since early 1981 – came after stronger-than-expected house price figures from the Nationwide reduced the chances of a cut in interest rates in the UK.

That makes the pound a better bet for investors, particularly after the US Federal Reserve reduced rates, as expected, to 4.5%. The Fed also reduced its benchmark interest rate by half a percentage point from 5.25% in September.

In contrast, it is looking less likely that UK policy-makers will cut rates from 5.75% in order to protect the economy from recent financial turmoil.

The Bank of England will be wary of fuelling inflationary pressures, particularly at a time of high oil prices.