The turbulence on global financial markets will clearly affect the UK economy and inflation but it is too early to tell by how much, Bank of England hawk Andrew Sentance said on Monday.
A squeeze on global credit markets resulted in mortgage lender Northern Rock having to ask the central bank for emergency funding, triggering a panic among investors and sparking the first bank run in Britain in more than a century.
In a speech to a business audience in northern England, Sentance said policymakers needed more time to assess the economic fall-out from the financial turmoil over the summer. "We will be updating that assessment in November, when we will be better able to take account of the recent financial turbulence, which will clearly have some impact on the balance of risks for growth and inflation," Sentance said, according to the text of his speech.
He said the implications for monetary policy were far from clear.
"To inform our judgements we will be monitoring closely any changes in the cost and availability of credit to businesses and households alongside all the other data relevant to the outlook for inflation," Sentance said.
There were already some signs that five interest rate hikes in the last year were starting to affect consumer spending, and judging the response of consumers to those increases and financial conditions was now a key issue for the Monetary Policy Committee.
"Over the summer, there have also been some signs that the recent tightening in policy is beginning to slow the growth of domestic demand -- particularly consumer spending -- though these indications are still tentative."
However, Sentance noted that the widespread take-up of fixed-rate mortgages among households meant rising borrowing costs may take longer to feed through. The Bank rate is currently at a 6-year high of 5.75 percent.
On inflation expectations, Sentance said that evidence on wages had been "reassuring" and some business surveys suggested pricing expectations had moderated somewhat.
And he warned that policymakers cannot be expected to react to every shock to the UK economy stemming from global troubles. The U.S. Federal Reserve last week slashed interest rates by 50 basis points to protect the economy from financial market woes.
"It is clearly not practical for policymakers to try to offset every shock. We do not have the information to do it perfectly, and the lags and uncertainties in the operation of monetary policy mean that we could inject unwanted volatility into the economy in an attempt to do so."