Tucker says BoE can only partly cushion credit blow

By Christina Fincher

LONDON (Reuters) - The Bank of England aims to cut interest rates gradually to cushion the blow from the credit crunch but may need to let the economy slow to curb inflation, policymaker Paul Tucker said on Wednesday.

Tucker, the bank's executive director for markets, told a financial audience in London the process of deleveraging in the financial system was ongoing and authorities needed to cooperate both with their international counterparts and with industry.

Tucker said credit conditions had deteriorated over the past two months but added that inflation risks -- stemming from the rise in commodity prices and a weaker pound -- meant the Bank could not offset the full impact of the credit squeeze.

"Given this unusual combination of significant downside and upside risks to the medium-term inflation outlook, the broad policy is to offset some but not all of the adverse shock to demand from tighter credit conditions. And to do so by changing Bank Rate gradually and with transparency," Tucker said.

"To be clear this approach probably means allowing a degree of slack to develop in the economy, in the interests of avoiding taking risks with inflation on the upside."

Tucker said that immediate cost pressures had worsened since the Bank's February Inflation Report but noted that wage pressures had been subdued so far.

"The picture on the real economy is mixed," he said. "What is clear is that credit conditions are unambiguously tighter than two months ago."

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