Bank of England pledges more liquidity help
Bank of England governor Mervyn King said today that the UK central bank remains in discussions with UK financial institutions over long term solutions to the credit crunch, and said the Bank will adhere to its current emergency lending plans for now.
Appearing before a parliamentary Treasury Committee, King said the Bank of England (BoE) will renew a three-month auction from January that expires on April 15. The amount of funds on offer will be determined at the time of the new offering.
Conservative MP Michael Fallon accused the BoE of responding to market turmoil at a "snail's pace" in comparison to the European Central Bank and the Federal Reserve. King responded by claiming he did not think there was "any significant difference" in the approaches taken by the central banks.
King said the BoE had to monitor spreads between borrowing costs "in order to work out by how much we should be changing the bank rate", and conceded that wider margins made the Bank more disposed towards cutting rates.
King added that any plan of action to resolve the current crisis must require the banks' shareholders, rather than taxpayers, to take on the risk of losses. King also said any assistance should be to enable lenders to finance existing commitments rather than to subsidise new business or securities sales.
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Soaring utility bills are likely to contribute towards UK inflation hitting 3%, King told the committee. However, he was confident that the inflation rate would move back down towards the government's 2% target rate in "the next couple of years".
Charles Bean, the BoE's chief economist, claimed that the market turmoil had not thus far affected the economy enough to justify new measures to help home-owners. Bean said there had not been "an extreme slump" in either "the housing market or in the economy in general."
Governor King echoed this view, saying that consumer spending had turned out to be more robust than expected, suggesting that the economy has not "ground to a halt".
King said that although average mortgage rates for Britons are little changed from August's levels, despite two base rate cuts by the central bank, a slow-down in the housing market would eventually make it easier for first-time buyers to get on the housing ladder.
