John Gieve: The impact of the financial market disruption on the UK economy Speech by Sir John Gieve, Deputy Governor of the Bank of England, to the London Chamber of Commerce and Industry, London, 17 January 2008. *  *  *  Introduction These are testing times for the MPC. The latest official figures for growth confirm the strength of the economy in Q3 with above trend growth in domestic demand and a growing current account deficit. But the evidence from surveys and other timely indicators is that growth is slowing quite sharply now, in part because of the rises in interest rates last year. That in itself might justify a progressive shift in policy – from restrictive to a more neutral stance. And the case for easing has been greatly strengthened by the disruption in global credit markets and in our own banking system which brings a risk of a deeper downturn. However we have also seen a big rise in the world prices of oil and food. That is being amplified in the UK by a fall in sterling and is now coming through in our food, petrol, gas and electricity prices. These are likely to raise our inflation rate well above target in the coming months at a time when short term inflation expectations remain uncomfortably high. This combination of upside and downside risks complicates our task of keeping inflation on track to meet the 2% target.
BIS Review 7/2008  7  Chart 5: Mortgage arrears and possessions rates  Chart 6: Household secured and corporate credit availability Net percentage balances(a) Easier credit 30 Corporate 20  Percentage greater than 3 months in arrears  Percent  Household Secured  7  0.9 0.8  6  10  0.7 5  0.6  0  4  0.5 0.4  -10 -20  3  Possessions (LHS)  -30  0.3  2  0.2  Arrears (RHS)  1  0.1 0 1990  -40 -50 -60  0 1993  1995  1998  2001  2004  2006  Source: CML Back cast data before 1994  Tighter credit  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1  Reported change, past three months Expected change, next three months Source: Bank of England Credit Conditions Survey  Chart 7: Quoted mortgage spreads  Chart 8: Mortgage product availability (a)  Thousands  Basis point spread to funding rate 250 SVR  Credit impaired Prime  200 150  Bank Rate Tracker 100  5 yr fixed  50 0 2 yr fixed -50 2001  2002  2003  2004  2005  2006  2007  Source: Bank of England. (a) SVR mortgages spread over one month lag of Bank Rate; Tracker mortgages spread over Bank Rate; 2 yr, and 5 yr fixed rate mortgages spread over one month lag of 2 and 5 year swap rates.