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Bank of England economist hopes UK recovery will continue

THE Bank of England's chief economist has expressed hopes that the UK economic recovery can continue, while cautioning there is a long way to go and citing risks that the housing market could overheat again.

In a speech yesterday, Spencer Dale also declared that the Bank's Monetary Policy Committee was fully aware that "extraordinary low interest rates are likely to be needed for some time yet". UK base rates have been at a record low of 0.5% since March 2009.

Mr Dale, addressing the Confederation of British Industry's East of England midwinter lunch in Newmarket, meanwhile cited concerns that companies' reluctance to borrow from banks to invest might reflect a breakdown of trust.

He posed the question: "Why, after throwing everything bar the kitchen sink at the economy over the past few years, has the economy started to grow only now?"

Mr Dale cited an easing of credit conditions and a reduction in economic uncertainty as developments which, at least with the benefit of hindsight, seemed important in driving the turnaround. While citing an easing of credit conditions for many companies and households, he emphasised that he recognised fully that the ability of many small and medium-sized enterprises to access credit at reasonable rates remained impaired.

Separately, raising the possibility that a lack of trust might be reducing companies' appetite to borrow, he said: "Many companies were let down by their banks during the financial crisis, and I fear that many will be reluctant to return to a business model which relies on their banks providing liquidity and support in times of need. The reluctance today of some companies to borrow from their banks may be less a lack of demand and more a breakdown of trust."

He added: "Although an understandable response to the events of the past few years, an increased prevalence of self-insurance is not good for the efficient functioning of our economy."

Mr Dale noted signs of "thawing" in the housing market over the past six months or so.

Welcoming "signs of life" in housing transactions and mortgage approvals, and a pick-up in house prices, he said: "A healthy housing market is good for our economy and will help to support the recovery. Most importantly, it will underpin further increases in house building, which has played an important role in driving the economic growth we've enjoyed this year and which, as a nation, we need to see."

However, he added: "Let's not be naive. Anyone with more than a passing interest in British economic history is aware that the UK housing market has a sort of microwave-type quality to it, with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds. The Bank is fully aware of this risk. The good news, however, is that it's far better equipped to respond to these types of risks than in the past."

He declared that the economy appeared to have turned a corner.

Mr Dale said: "There are good reasons for optimism that the recovery will persist."

But he warned: "The damage and losses associated with the financial crisis and the years of frustration and disappointment that followed won't be reversed simply by one or two quarters of strong growth."

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