Who's right on the credit crunch, Mervyn or Jean-Claude?

Two weeks ago Mervyn King's Bank of England said conditions in the credit markets were showing signs of improvement and it expected that trend to continue. Prices of debt securities had been implying cataclysmic default rates among American borrowers that surely weren't realistic. Soon bottom-fishing investors would start nibbling, pushing prices of these depressed securities back up again. And in some parts of the debt markets, like leveraged buy-out loans, that was already happening

But there was no such reassurance from his opposite number at the European Central Bank, Jean-Claude Trichet. He believes we are very much still in "an ongoing, very serious market correction." Pressed by the BBC's business editor Robert Peston on whether the worst was behind us, M Trichet pointedly refused to say the point of maximum danger was past.

The sentiment sounds different, but they may both be right.

In the narrow, purist sense, the credit crunch does look to be easing. Banks are a bit more willing to lend to one another, a bit less paralysed by fear. The easy liquidity being offered by the Bank and ECB is starting to have a lubricating effect. The billions raised in fresh equity by banks is also restoring confidence.

But to the shopper on the Clapham omnibus, the credit crunch is not about the esoteric workings of Libor and the financial swaps market. It is about rising mortgage bills, falling credit card limits and having to stretch the household budget further in the face of rising fuel and food prices.

While Mr King could justifiably say the crunch in the interbank markets is easing a tiny bit, he probably wouldn't disagree much with M Trichet's concern about inflation and the need to keep monetary conditions tight enough to stop inflationary expectations bubbling up.

Even if the risk of a major idiosyncratic shock like a bank failure has for the present been seen off, the secondary effects of the crunch are only just beginning.

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