Stark warning from Bank of England economist

Bank of England economist Charlie Bean has warned that the current turmoil in world financial markets could lead to a severe downturn in the UK. Given the recent run on Northern Rock, he warns that it is possible to envisage a sequence of events that generate a greater or more prolonged contractionary impact. “If households have to save more and borrow less, this could see less spending in the shops and a slower economy,” Mr Bean said. “The housing market could be particularly vulnerable as the supply of cheap mortgages reduces and banks become stricter with their lending.” With the Bank of England keeping inflation close to its 2% target, there is a danger that it could rise above this, which will prevent the Bank from lowering interest rates. “We cannot afford to relax on the inflation front,” Mr Bean insisted.