It is clear that the near-term outlook for the UK economy has worsened. To a significant extent this reflects the continuing fallout from the sharp turnround in conditions in debt markets that began last August – the “credit crunch”. The implications of this in terms of duration and severity remain unclear. That creates difficult policy challenges for the government.

One of the risks is that funding for mortgage lenders in the UK could remain difficult for many months. There have been very few issues of mortgage-backed securities or UK covered bonds since last August. It is often said that these wholesale markets are in effect closed – which really means that the price (or yield) that would now be acceptable to potential buyers of debt backed by mortgages has risen so much relative to the likely return on mortgage assets that issuance is not commercially viable. There are broadly two ways to view this: either it is a return to more reasonable pricing of debt – in which case the yield on mortgages needs to rise to reflect the (now more sustainable) cost of funds; or the price (yield) at which lenders could now issue mortgage-backed securities has drifted away from what is reason­able, given an informed assessment of the risk with the underlying assets.