Bank warns credit crunch turmoil could continue for many months

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The Bank of England and CBI have issued new warnings about the future health of Britain's economy, expressing concerns about the ongoing credit crisis, and revealing a continued deterioration in business and consumer confidence.

Publishing its quarterly bulletin, the Bank said "financial markets remained fragile", claiming it believed the current market uncertainty could continue for some time to come.

"Market contacts [believe] it would take time for the full implications of the recent financial market turmoil to becomeclear, and while that is the case financial market volatilitywould be likely to continue," the report said.

The Bank suggested that one of the continuing drivers of the credit crunch was a "hoarding" of liquidity by many of the world's largest lenders, exacerbated by "uncertainty about funding commitments to specialist financing vehicles, conduits and corporates".

Last week, a group of the world's biggest central banks including the UK unveiled plans to inject more than $100bn (49.5bn) of liquidity into the market. However, the package did not have the desired effect on interbank lending rates, which fell by only a few basis points.

Meanwhile, the CBI has said it is downgrading its forecast for UK growth in 2008 for the third quarter running, blaming the continuing credit squeeze and record oil price rises.

The CBI now predicts that the British economy will grow by just 2 per cent in 2008, in line with most other forecasters, though at the very bottom of the Treasury's official range of 2 to 2.5 per cent.

However, in more marked contrast to the Treasury, which sees the economy rapidly bouncing back in 2009 to growth of between 2.5 per cent to 3 per cent, the CBI sees a much morefeeble recovery to 2.1 per cent in 2009. It believes that growth will bottom out at an annualised rate of 1.6 per cent in the fourth quarter of 2008.

While the CBI stresses it believes the economy will enjoy a "soft landing", it admits the risks are "to the downside", with great uncertainty about the length and severity of the credit crisis.

Ian McCafferty, the CBI's chief economic adviser, said: "Uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence, and how far the property markets will suffer. Borrowing conditions are already tighter for some households and businesses."

The CBI says consumer confidence has already weakened, due to the problems in the financial markets and thecontinuing high energy and petrol costs, while business confidence has also entered a downwards spiral.

Consumer spending is now expected to slow more sharply than previously thought, with growth falling from 3.1 per cent this year to 1.9 per cent in 2008. The rate of increase in realhousehold incomes is expected to pick up modestly following weaker growth in 2007, however, offering some support toconsumer spending.

The CBI also predicts that inflation, on the CPI measure, will edge up next year, to 2.4per cent, though the RPI, taking into account lower house prices and mortgage interest costs,will fall. It envisages a fall of 1 per cent in the housing market in 2008, but believes a wage-price spiral, prompted by high fueland food prices, will be avoided because of the overall weakness in demand and because itbelieves firms will absorb higher costs through loweringtheir margins.

However, the Bank of England sounded a relatively upbeat note about its ability to control inflation in the face of large increases in energy and food prices.

The Bank's chief economist, Charles Bean, said: "So far the impact of rising energy prices on both activity and inflation appears to have been much less pronounced than in earlier episodes of sharp energy price increases. That is probably related to the greater flexibility of both goods and labour markets, as well as the anchoring of inflation expectations."