Bank deputy chief warns of market trouble to come

Britain is facing the risk of renewed turmoil in the financial markets, the new deputy governor of the Bank of England warned yesterday.

Professor Charlie Bean, the deputy governor for monetary policy and a former chief economist at the Bank, raised the prospect of a slowing global economy triggering a new round of problems with corporate loans and said that the impact of the credit squeeze could be greater than Bank projections.

He told members of the Commons Treasury Select Committee that Britain faced "major conflicting risks" threatening the Government's inflation target from the problems of a slowing economy and rising commodity prices.

In a memorandum to the committee, Professor Bean warned that the "dislocation" in the financial markets "probably has further to run, especially if a slowing economy here and abroad generates a second round of write-downs, this time associated with corporate loans. Moreover, the impact of the tightening in the terms of availability of credit could prove greater than is embodied in the central case in our most recent set of projections".

He said that increasing oil and other commodity price rises would lead to higher inflation becoming "embedded in the economy", warning that people might seek to offset price increases by making higher wage demands. He said: "There is no doubt that the UK economy presently faces the most challenging set of circumstances since at least the early 1990s and probably earlier."

Professor Bean said oil prices could continue to rise for another two years and cautioned that Britain faced the danger of a pay-price spiral if workers tried to compensate by pushing up wages. He said: "It certainly poses a significant challenge. There is no doubt about that at all. It may be a relatively unlikely event but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low, round about the target, they start building it into their pay and prices and inflation becomes much more embedded into the system... Provided pay growth remains subdued, the current pick-up in inflation will be temporary."

Living standards, the deputy governor stressed, will inevitably be lower because of the global inflation in commodity prices.

The appointment of a new director of communications at the Bank, the former BBC journalist Jenny Scott, offered a "trigger for reconsidering our strategy" of communicating the Bank's polices, said Professor Bean.

He made clear his intention that the Bank should "focus on its communications agenda" and that he wanted it to "reach out to a broader audience" – and appeared to warm to a suggestion from one MP that he might make a speech to the TUC Conference, an unprecedented move for a senior Bank official.