A downward spiral of house prices and a drop in mortgage lending are the biggest short-term economic threats, a Bank of England rate-setter has warned.
Kate Barker, a member of the Bank of England's Monetary Policy Committee, warned that the bank would not be able to stop this in the short term.
Therefore, she said, the MPC would be paying particularly careful attention to the financial and property markets.
But rate cuts would be hard to justify in the face of inflationary pressures.
"The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil," she said.
"If credit tightening were to prove more severe than in the MPC's present central projection, leading to a significant fall in lending to households and companies, this could prompt a further decline in property values.
"The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below target inflation," she told the North Staffordshire Chamber of Commerce.
The possibility of the credit squeeze in the financial markets choking off the property market has already been raised by the Council of Mortgage Lenders.
Last year, it warned that the crisis in the financial markets might turn off the "mortgage tap" because banks needed to borrow about a third of the £90bn or so they expect to lend this coming year.
Speaking in a personal capacity, Ms Barker noted that even if house prices fell by 15%, only 5% of mortgage holders - and thus just 2% of all households - would find they were in negative equity, whereby their homes were worth less than their mortgages.
But the interplay of reduced lending and falling property prices would still be a big drag on the wider economy.
"A prolongation of the present difficulties in accessing wholesale funds could restrict the quantity of mortgage lending during 2008," she said.
"In this case, the mortgage market could become less competitive and more expensive, feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders' balance sheets, reducing lending capacity further."
Ms Barker warned her audience that it would be hard for the MPC to take this into account quickly in its monthly deliberations on interest rates.
"The consequent adverse impact on growth could prove difficult to turn around quickly, potentially resulting in a protracted period of low output growth and below-target inflation," she said.
She hinted that ideally, interest rates should be cut further to head off this possibility.
But she pointed out that strong upward inflationary pressures in the economy made it more likely than not that the Bank's inflation target would be breached later this year.
In the short term, she warned, the economy faces "an overall sharp slowdown in output growth".