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Warning to banks as King hints at April cut
Hugo Duncan, Evening Standard26.03.08
The Bank of England today paved the way for a reduction in interest rates next month but warned it will not follow the aggressive cuts seen in the United States.
Governor Mervyn King said the financial crisis has "moved to a new and difficult phase" as the deepening credit crunch increases the risks of a sharp slowdown in the economy.
He said "Yes" when asked by MPs on the Treasury Select Committee if the tighter lending conditions mean interest rate cuts are more likely.
Economists said King's dovish comments suggest he could vote for a rate cut as early as April after resisting such calls this month. The Bank has already reduced rates from 5.75% to 5.25% since December.
Howard Archer, of Global Insight, said: "We now expect the Bank of England to trim interest rates by a further 25 basis points to 5% in April rather than in May as we had previously forecast. Further out, we expect interest rates to fall to 4.5% by the end of the year and to 4% in the first half of 2009."
However, King was adamant that the UK will not follow the same path as the US, where the Federal Reserve has slashed rates from 5.25% to just 2.25% in recent months, including a cut of 75 basis points last week.
King said there were "two quite different policies and two separate sets of circumstances" in Britain and recession-bound America. "This is not an economy that has ground to a halt," he said, adding that conditions in the US are "materially worse" than in the UK.
He added that inflation is still a major concern, having hit 2.5% in February and now heading towards 3% - well above the 2% target.
King said the Bank faced "a difficult balancing act" between rising inflation and slowing economic growth. "We are not going to lose control of inflation in this country," he added.
He also signalled that the era of unfettered liberalism in the banking system is coming to an end, condemning the "hubris" of bankers whose bad decisions had brought crisis to the City.
"There's a lot of hubris around in thinking expansion of financial services was a good in itself," he said. "It's not, it's a means to an end."
King said closer regulation of financial services is inevitable in the wake of the crunch. Financial institutions "will have to hold more capital in the longer run", and have their activities "monitored more carefully" - although he said it was not the time for "knee-jerk reactions".
"I think the pain that will be suffered by the financial institutions this year will keep minds focused on it for a number of years," he said.
Reader views (5)
I will be very annoyed if interest rates are cut further.
The value of the pound is already sliding. Inflation is way out of control despite whatever fiddling of the CPI figures the government tries in order to disguise it.
On top of this the housing market is ridiculously over priced and this may help prolong that situation.
If this continues and interest rates are cut even more aggressively it will also act to devalue the money that the the prudent have scrimped and saved for a rainy day and makes all their efforts pointless when instead they should be rewarded for their hard work.
I know many hard-working people of my age (30) that are seriously considering moving abroad to live and work because of the wasteful way the taxpayer's money is treated here in the UK - take MPs expenses for just one example.
If this happens you can be sure we will be taking our hard earned savings with us rather than wasting it on an overvalued property here!
- Peeved, Manchester, UK
How can the BoE signal rate cuts when CPI is at 2.5% and climbing and retail sales rose in February by more than expected. Rate cuts will feed inflation through a weaker Pound - insanity. Surely a period of falling house prices would be the tonic this country needs to regain a balanced market and allow first-time-buyers back in. Turning the cheap-money taps on again is hardly what the most indebted nation on Earth needs now!
- Rob, Exeter
The hubris is caused by under capitalisation - the banks have too little capital for the huge level of risks they have taken.
The BOE should NOT cut interest rates unless those rate cuts are passed onto the consumer. Interest rate cuts are not to enable banks to make profits and regain capital - they are for running the economy - all the economy - not just the banks.
The banks should be required to increase their capital base back to levels previously considered prudent. The bigger banks, will then have the capital to buy out any banks going to the wall - and like Morgan, make great deals. But unlike the USA, this should NOT be funded by the taxpayer. Banks gets rewards for risks they take - and should not be bailed out by the BOE/taxpayer either through intervention or through being given cheap credit which is not then passed on. The banks should be servants of the economy - not profiteers from a Labour Government.
- Ian, Surrey, UK
If interest rates are cut now how can inflation come down to the banks 2% target, they went up last year didn't they when inflation was this much above it's target. Does this just mean they will go up again when inflation goes out of control again by which time the country will no doubt be in recession.
- Anthony Williams, Marple, UK
If they reduce rates at this time with domestic inflation rising and imported inflation threatening it would be a massive mistake and throw out all the wrong signals. Pain will have to be felt and the BoE must not bow in to political pressure. They must maintain their credibility at all costs.
- Geeorge, Aylesbury
