LONDON, Nov 26 (Reuters) British monetary policy may have to remain tight for some time given rising inflation pressures even though financial market turmoil could spread, Bank of England chief economist Charles Bean said.
The BoE is faced with the tough task of managing a weaker economic outlook as a result of the credit crunch and rising inflationary pressures due in part to higher commodity costs. It has so far kept interest rates steady at 5.75 percent.
Markets expect the central bank to cut borrowing costs soon but policymakers have given few signals that they are in a rush to act during the credit squeeze, preferring to wait and see how the economy develops.
''The backdrop to our attempts to keep inflation in line with target is less favourable than it has been,'' Bean was quoted on Monday as saying in the Liverpool Daily Post newspaper.
''What it will mean is if the imported component of inflation is somewhat higher the domestically generated component needs to be somewhat lower to compensate and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down.'' But Bean said the repercussions from this year's financial market turmoil could linger for some time and spread to stock markets and commercial property, suggesting policymakers are increasingly worried about a prolonged economic slowdown.
''It will be quite a long time before things come back to a full state of normality,'' Bean was quoted as saying.
CREDIT CRUNCH LINGERS Money market conditions have tightened again in recent sessions, indicating that the credit crunch is far from over, with interbank sterling lending rates rising to a two-month high on Monday.
Bean, who voted with a majority of Monetary Policy Committee members to keep interest rates on hold this month, said that only a small fraction of the likely losses resulting from the U.S. subprime mortgage market had come to light.
''It's quite likely that over the coming months there will be more revelations to come out, not necessarily just in this country,''he said.
The credit crunch triggered the first run on a British bank -- Northern Rock -- in more than 140 years in September after it sought emergency help from the BoE and markets are rife with rumours about the health of other financial institutions.
Britain's third largest bank Barclays revealed less damage than had been feared earlier this month, but investors remain anxious over forthcoming trading reports from the sector.
Barlcays, Bradford&Bingley and Royal Bank of Scotland are among those due to issue trading updates in the coming weeks.
However, BoE Governor Mervyn King has said most banks should be protected by the massive profits they made when conditions were more favourable.
''If ever there was a moment when it was helpful for banks to have made large profits it must be now,'' King told reporters at the November Inflation Report press conference.
''They will provide the cushion which guarantees the stability of the banking system.'' BoE deputy governor Rachel Lomax -- who surprised markets by not voting to cut rates this month -- has also highlighted the tough choices policymakers are having to make as price pressures swell and the economic outlook softens.
Lomax said in a speech that interest rates may be too high but it could be risky to signal lower borrowing costs when inflationary pressures are mounting.
REUTERS BJR HS1823