Posted by: Linda Yueh on December 13, 2011
The euro crisis isn’t just affecting economic growth in the U.K., but may also unleash another credit crunch. Spencer Dale, the Bank of England’s chief economist and member of its rate-setting Monetary Policy Committee, pointed to the signs in an interview today:
U.K. banks haven’t been able to issue unsecured term debt for most of the second half of this year. That wasn’t a major problem for U.K. banks since they’ve done most of their funding. [They were] pre-funded for most of this year by the time those markets effectively closed.
Still, this may explain why the BOE opened Sterling 30-day credit lines for banks last week—an action unseen from the bank since the 2008 financial crisis. Indeed, Dale said that although there hasn’t been “significant” worsening of credit conditions for households and companies, the U.K. needs funding markets to re-open:
And unless they do relatively quickly, I think there’s a real risk that credit conditions in our economy could tighten further.
So, with the possibility of another credit crunch and a flat-lining economy, the BOE faces a dilemma: should it pump significantly more cash into the economy via quantitative easing to open the credit markets—and risk fanning inflation—or wait and see?
Until we get a better sense of underlying inflation pressures I think there will be a nervousness in terms of the extent to which one should keep on stimulating the economy, Dale said.
Inflation has come down to 4.8 percent, but it’s still more than double the BOE’s 2 percent target and has been above target for 52 of the past 60 months. The BOE is watching to see how quickly inflation slows before considering more stimulus because, as Dale said, the inflation dynamics are uncertain. Such a delay may push the consideration of more QE to after March of next year.
For all the uncertainty about inflation, growth and even QE, or maybe because of it, one thing is clear: the euro crisis may not only erode U.K. growth but could once again plunge its banks and the wider economy into another credit crisis—2008 all over again, without the U.S. subprime mortgages.
Photographer: Chris Ratcliffe/Bloomberg