Bank's Besley says lending conditions key to rate policy

By Matt Falloon and Christina Fincher

LONDON (Reuters) - The Bank of England faces a tough time balancing rising inflation risks against a weaker economic outlook this year but must pay close heed to lending conditions, policymaker Timothy Besley said on Monday.

Besley, a noted hawk on the rate-setting Monetary Policy Committee (MPC), said tighter credit conditions meant consumer spending could slow sharply and the easy availability of mortgage lending seen in early 2007 was unlikely to resurface any time soon.

"Considerable weight should be placed on conditions in financial markets in understanding the transmission of monetary policy to the real economy," Besley said in a speech in London.

"Judging whether a given level of Bank Rate is restrictive depends importantly upon the conditions that prevail in financial markets at the time."

While Besley is regarded as an arch-hawk on interest rate policy, there was little in his speech to suggest he opposed this month's rate cut to 5.25 percent.

"This apparent balanced stance may be seen as significant in itself, given Besley's hawkish behaviour in his voting behaviour so far during his time on the Monetary Policy Committee," said Howard Archer, an economist at Global Insight.

"The comments indicate that if credit conditions remain tight, he could well favour a further reduction in interest rates."

HAWK AND DOVE