–Adds Detail To Version Transmitted At 1035 GMT
–Euro Zone Turmoil Could Hit Credit Flow, Weighs on Growth

LONDON (MNI) – The turbulence in the euro zone is likely to
persist, hitting growth there and endangering credit flow here, Bank of
England Deputy Governor Charles Bean says.

In a speech to the Council of Mortgage Lenders Bean was downbeat
about the near term outlook for the euro area, seeing little likelihood
of an early resolution to its problems. On the domestic front, he
highlighted the strains on UK households’ finances and said the most
likely outcome was a sharp fall in inflation.

Bean said last week’s EU leaders agreement was an important step on
the route to a successful resolution, but still only a step.

“The peripheral economies of the euro area will still be faced with
substantial adjustment challenges, including the need to rebalance their
economies and improve their competitiveness. So the strains in the euro
area seem likely to continue for some while yet,” Bean said.

The decision by the Greek government to hold a referendum over the
bailout sanctioned by EU leaders “has injected additional uncertainty,”
Bean said.

Bean noted the increased tensions in banking and financial markets,
with sovereign debt risks and strained fiscal positions fueling fears
over some governments’ ability to support their banking systems.

While UK banks have limited exposure to peripheral euro zone
countries market strains will, and already are, having a knock-on effect
here.

“Unless those conditions improve, our banking contacts indicate
that the availability of credit to the real economy may soon begin to
suffer,” Bean said.

“Moreover, the heightened tensions in financial markets are likely
to have raised uncertainty more generally and further depressed
household and business confidence. Our regional Agents are already
starting to tell us that some businesses are putting investment projects
on hold as a result,” Bean added.

He set out the reasoning behind the BOE’s Monetary Policy Committee
decision at its October meeting to sanction a new round of quantitative
easing.

“Earlier this year the recovery seemed broadly on track. But, as
time has passed, so it has seemed less secure,” Bean said.

He placed weight on private sector business surveys rather than
official GDP data, with the latter’s quarterly outturns distorted by the
downward impact of an extra bank holiday and the Japanese tsunami in Q2
and the unwinding of these effects in Q3.

“Business surveys and other indicators suggest that the underlying
rate of expansion has probably eased. Those same surveys point to only
very moderate growth at best in the final quarter of this year,” Bean
said.

Domestic growth slowing and the international outlook has
deteriorated. Alongside the euro zone turmoil there is evidence that
the pace of growth in China and other emerging economies has
slowed.

With UK inflation high, running at 5.2% in September, and earnings
growth subdued household finances have been under intense pressure.

“It is probable that real household disposable income will turn out
to have fallen during the second half of this year too,” Bean said.

While headline inflation much of this reflects external factors and
domestically-generated inflation “appears to have been running well
below the 2 per cent target,” he said, adding that headline inflation
is likely to fall sharply.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

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