Credit woes worse than thought

London: The credit squeeze has proved more serious than initially thought and the latest escalation of tensions poses downside risks to both the economy and inflation, Bank of England policymaker Kate Barker said on Thursday.

Speaking to business leaders in northwest England, Barker said it was hard to judge what the final scale of the shock to the economy would be, but predicted lending by UK banks would remain constrained for a "considerable period".

Talking about the risks to the economy, she struck a dovish note, similar to that of John Gieve, the bank's deputy governor, earlier this week.

Downside risks

"The latest developments in financial markets have now increased the downside risks," Barker said. "There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target."

Britain's central bank has held interest rates at 5.0 per cent since April after cutting them three times since December. Inflation is more than double the bank's 2 per cent target but investors are betting the threat of recession will prompt another rate cut soon. Barker is considered a swing voter on the bank's Monetary Policy Committee.