LONDON (AFX) - Bank of England executive director Ian Plenderleith said the risks to the UK economy are "predominantly on the downside" amid the uncertainties arising from the downturn in the U.S.
"The economy could grow more strongly or less strongly than we currently project, though the risks lie predominantly on the downside," he said in the text of a speech to the National Association of Pension Funds Investment Conference in Eastbourne.
"The uncertainties are probably greater than normal just at present, but we can take some confidence from the underlying soundness of the economy," he added.
If the downturn in the U.S. is deeper and more prolonged, the UK faces slower growth and lower inflation than estimated by the BoE's February inflation report, he said.
"That would, of course, be grounds for us to contemplate further easing in our monetary stance," Plenderleith said, stressing that the 2.5 pct inflation target is a symmetrical one requiring equal action whether inflation undershoots or overshoots the target.
"We take this symmetrical nature of our responsibility very seriously and there is undoubtedly a significant risk that the U.S. slowdown could have a material dampening effect on UK activity," Plenderleith said.
One mitigating factor is that the U.S. slowdown comes after an extremely buoyant period of growth. There is plenty of evidence the U.S. needed to slow to address the imbalances in its economy, he said. "So part of what is happening should be helpful in providing a sounder base for sustainable recovery," Plenderleith added.
In addition, the benefits from the new economy experienced by the U.S. are likely to provide a basis for recovery when the present adjustment runs its course, he said.
Further, the Federal Reserve has shown willingness to act "rapidly and vigorously" in easing monetary conditions as a response to the slowdown. While equity valuations remain volatile, the market appears to be expecting a reasonable prospect for recovery in the U.S. after the present adjustment, he said, citing the dollar's steady performance over recent weeks. The UK's domestic economy also presents uncertainties - among them, the changes in the supply side of the economy, he said.
"My own view is that supply side improvements are delivering benefits, but the process is a gradual and progressive one, rather than any sudden leap forward," Plenderleith added.
Another uncertainty comes from the underlying strength of domestic demand which points to "less need for stimulus", he added. "Consumer spending may be slowing somewhat, but it remains relatively buoyant," he said.
The UK economy appears to be "healthy and thriving", indicating that its performance can be sustained without immediate risk of overheating. "But it is also a situation in which cost and price pressures can begin to build up. The task of the (BoE's) Monetary Policy Committee is to ensure that this does not happen, by keeping inflation in line with our target so that the economy can continue to grow at a sustainable rate," he said.