Monday, November 26, 2007

Bank of England warns credit crisis to worsen

Charles Bean said that the banks have so far reported "only a relatively small fraction of the likely losses associated with the US sub-prime market."

"It is quite likely that, over the coming months, there will be more revelations to come out, not necessarily just in this country," he added.

The message from Mr Bean comes after Goldman Sachs warned earlier this month that sub-prime mortgage losses could force banks to slash lending by $2,000bn (£980bn) and push the United States into a deep recession.

Mr Bean said that the immediate future would be characterised by "lots of volatility" and said that it would be "quite a long time before things come back to a full state of normality."

He made the comments in an interview with the Liverpool Daily Post, and said that the Bank was waiting to see what impact the crisis would have on the wider economy.

"What matters particularly to us is the impact on the economy at large.

"It is reasonable to expect lenders to be more cautious in extending loans whether to households or riskier lending to businesses, maybe some mergers and acquisitions, maybe the commercial property market may be particularly hit.

"That's something that the Monetary Policy Committee will be monitoring closely," he said.

He added that monetary policy would depend on inflationary pressure from the rapidly growing economies of China and India.

"Over the last two or three years, we have moved into a slightly less favourable external environment where the ill-effects of the development of China and India have started to be felt in the form of intense upward pressure they have been putting on commodity prices.

"Those pressures are likely to remain there for some time. The key question will be the extent to which the supply of those commodities can expand to meet the increasing demand from emerging economies.

The Telegraph

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