The credit crisis is set to get worse before it gets better, according to the Bank of England’s (BoE) chief economist, Charles Bean. Putting things in perspective, Mr Bean opened his speech, titled 'Walking the Tightrope: Prospects for the UK Economy' reminding listeners that over the last 15 years the UK economy has seen "generally robust expansion coupled with low and stable inflation."
However, despite the optimistic opening, he went on to discuss the credit crisis in hand and the outlook for the British economy over the next couple of years.
According to Mr Bean the credit crisis is a result of an international dependence on credit, he said: "While the turmoil had its epicentre in the United States sub-prime housing market, it is seen as the abrupt end of a more general boom in credit expansion."
Experts are calling for the Bank of England and the Government to take measures to ease the pressure currently being felt on the UK housing market. Addressing this issue, Mr Bean said: "The Bank is continuing to work with the relevant parties to develop approaches that will help to ease the strains and act as a bridge to a more normal outcome.
"At root, the problem is one of a lack of trust in a context of incomplete information about the scale and distribution of the likely losses associated with mortgages, other loans and derivative products." Mr Bean continued, referring to the financial troubles experienced by a number of banks in recent months.
Recognising the need for action to be taken to stem further, inevitable damage to the UK housing market, Mr Bean said: "The reduction in the availability of mortgage
funds seems likely to keep activity subdued and put further downward pressure on house prices relative to earnings, though it is difficult to say just how far adjustment will go and how fast it will be."
Mr Bean continued to highlight the vulnerability of the UK economy, describing it as a tightrope caused by inflation. On the one hand it could be forced to fall too far and on the other hand inflation could continue to rise and cause further credit tightening.
Concluding on a note of doom and gloom, Mr Bean reminded his audience that aside from the current disorder on the credit markets, the UK economy is soon to be affected by a global rise in food and energy prices which is threatening to push the rate of inflation even higher and continue to cause havoc on the economy.
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