Tonight:
9°c
King denies slow response to the banking crisis
Hugo Duncan13.11.08
The Bank of England was today forced to defend its handling of the economic crisis amid widespread criticism that it took too long to cut interest rates.
Asked if the Bank had been "caught with its pants down", governor Mervyn King strenuously rebutted the attacks.
King said "the world has changed" since the collapse of Lehman Brothers in September, and added that the Bank acted swiftly in response to the banking crisis.
Speaking at a Press conference after publication of Bank's Quarterly Inflation Report, he pointed to the recapitalisation of high street banks such as HBOS, Lloyds TSB, and Royal Bank of Scotland, as well as the decision to cut interest rates aggressively in recent weeks.
"That is a pretty big response," said King. "We haven't lost touch with reality."
He also insisted that last week's dramatic rate cut from 4.5 % to 3% was not the result of political pressure.
"At no point has there been any pressure or any phone call or any message to say that government would like the following outcome to be achieved," said King.
The Bank slashed its forecasts for economic output and inflation in what was the largest downward revision to the consumer prices outlook in any one quarter since the MPC was set up in 1997.
In August, it forecast a year of broadly flat output and inflation to fall from above 5% to the target of 2% within two years.
Today, it said the UK was already in a recession which will last until the end of next year. Inflation, meanwhile, will hit 2% in before potentially undergoing the first bout of deflation in almost 50 years.
The collapse of Lehman Brothers was pivotal, King said: "We have seen the biggest banking crisis since the outbreak of the First World War and arguably even bigger than that.
"The effect that has had on credit, the sharp downturn in confidence, activity, and orders, and the extraordinary fall in commodity prices - this was not expected in August."
The pound fell sharply after the report was published, plunging as low as $1.5201, its lowest level since August 2002. It was later down 0.92 of a cent at $1.5328.
King, who has already had to write two letters to the Chancellor explaining why inflation has overshot the target by more than 1%, now faces the prospect of having to write to explain why it has hugely undershot.
Reader views (11)
The more I read of Big Phil's posting, the more it makes sense. Any chance he could write for the Standard please?
- No Country For Old Men, London
Big Phil, I concur with all of your points, I shall polish my shoes at once so that you can fill them, whilst I fill my boots on a book tour
- Mervyn King, Threadneedle Street
The real crisis started a decade before the credit crunch hit. Alan Greenspan warned that "History has not dealt kindly with the aftermath of protracted periods of low risk premiums." (i.e. a risk premium being an asset yield above the risk free rate).The money supply growth of the mid nineties manifested itself in a stock market bubble which burst to be followed by the housing bubble prolonged by the availability of cheap bank credit to satisfy foolish consumer demand. The housing bubble was especially rampant in the UK with moronic Britons paying ludicrous values for "investment" and "holiday" homes and as such they face a well deserved and extremely severe slap on the face to bring them back into the real world. In 2005/6 property should have been targeted by moving base rates up aggressively whilst now cutting taxes, paid for by record receipts, to put money in the consumers back pocket. Our government squandered our record tax payments and now will borrow in an attempt to stimulate the economy resulting in higher taxes on top of the current highest taxation in UK history. Consequently the pound has collapsed against a basket of other currencies ensuring inflation is still with us only married to a slowing economy. Thanks to Gordon Brown we do not have the ammunition to combat this harrowing economic period. Surely it is he who should be dismissed and not the central banker who was (and in my opinion rightly so) concerned with inflation?
- Richard, colchester
Wise words from Big Phil. Are you sure you're not an economist?
- Neil Boom, London
King has totally lost the plot
He is obviously not his own man and is weak and ineffective.
He should be thrown out
- John Daniels, London England
If you go back less than 6 months all the noise then was for interest rate rises - just goes to show the predictions of these so called economists are little better than staking the GDP of UK.ltd on the 3.30 at Doncaster. At least there we can see if the horse has three legs !
- Guildfordboy, guildford
The UK has been in recession since 2000, it is only Gordon's imaginative book-keeping that has hidden this fact. So of course the response has not only been slow, it's been delayed far too long. The pain now will be huge.
- Threaded, Roskilde, Denmark
Mr King should have brought the interest rates down one year ago, he is out of touch with public needs and feelings too much text book econimics and not enough regulation to stop public uk banks buying up junk bad loans from the USA and weaking there balance sheets to such a degree that makes them worthless.
- Mohsen, malaga,spain
I am no economist but it was absolutely clear to me last June that recession was a greater risk than inflation and that action needed to be taken. The financial crisis was getting worse, credit was drying up, housing market was collapsing, consumers were reducing spending, wage inflation was under control because of rising unemployment, commodity prices (including oil) were falling and finally, if that list was not long enough, the US economy was slowing rapidly (there is an old City saying 'when the US sneezes the rest of the world catches a cold!'). Therefore, why did the BoE/MPC and Flash Gordon (forget about his glove puppet Alistair) wait so long to do anything? Their combined incompetence has consigned the UK to an unnecessarily long and painful recession.
What use are 2% of base rate cuts when there is no bank credit? But let's not forget, that the full impact of a base rate movement takes some 18 months to work through the system. However, the latest and future rate cuts may take even longer to benefit the economy because of the lack of credit.
The banks inexcusable behaviour is only exacerbating an already bad situation and I would recommend emergency legislation to force them to immediately pass on all base rate cuts. But I would go further and enforce a maximum lending profit margin on all credit cards - current rates are usuary and only creating further problems.
Yes, the economy needs immediate personal tax cuts and multiples of the £15bn bandied around!
- Big Phil, London, UK
Perhaps his next letter should be his resignation.
- Ken Wilkinson, Cape Town, South Africa
IF Mervyn King were chairman of a FTSE 250 company he would be sacked-what a joke in the city he has become-the weather forecast is more accurate!
- Harvey Lawrence, London
