-Originally Transmitted 23:00 GMT Monday
By Philip Uglow
LONDON (MktNews) - Deputy Governor of the Bank of England, David Clementi, said Monday that although current conditions in the UK economy are robust, the balance of risks has changed in the last couple of months.
Speaking to the British-American Chamber of Commerce in New York, Clementi said that "it is clear that the balance of risks has changed in the last couple of months, with the recent slowdown in world demand, signs of an easier labour market and the latest inflation numbers comfortably below target".
Still, Clementi noted that the domestic situation in UK is more robust than in the US and that the reasons the Fed gave to explain their recent cut, do not apply in the UK.
"Consumer confidence measures were, if anything, higher in the fourth quarter than the third; household demand has remained relatively strong; consumer credit numbers are strong; and in the pipeline are planned increases in government expenditure, though the outlook for the public finances remains strong", Clementi said.
Clementi noted that all "this will make the next meeting of the MPC interesting, particularly since the February meeting will include our quarterly review of the two-year MPC Inflation Forecast, in which we will try to calibrate the effects of the various changes I have mentioned..
Clementi is generally seen as a one of the more hawkish MPC members, having voted for a hike in rates at both the August and September meetings last year. His comments today suggest a change in stance and a growing alertness to the possibility of easier monetary policy ahead.
With respect to the US, Clementi said that the recent cut in rates has increased the probability of a soft landing and will reduce the risk of a sharp reversal of capital flows into US markets.
Still, he warned that it is important that "the irrational exuberance that marked the run-up in equity prices to their peak last year should not give way to irrational despondency."
As to the effects of any US slowdown on the UK, Clementi said that the direct trade effect would be relatively small and explained that the UK is more dependent on prospects in the euro area.
If there is an impact, Clementi said that "it is more likely to come via some other effect such as financial contagion or financial constraints on the UK affiliates of US companies."
Speaking about the Basel Accord, Clementi noted that banks should be better placed than in the past to deal with any sudden downturn. He added that although a soft landing in the US is the most likely outcome, "the system is in far better shape now than a decade ago to absorb, if necessary, a somewhat harder bump. I am not complacent and you can rely on the Bank of England to remain vigilant, whatever the outcome."