Worries that credit crisis may worsen
Nov 30 2007 by Iain Laing, The Journal
THERE may be worse to come in the credit crunch crippling financial markets, putting borrowers and businesses at risk of a clampdown on lending, the Governor of the Bank of England warned yesterday.
Mervyn King told Treasury Select Committee MPs that there was a “big risk” that the squeeze seen in wholesale money markets could tighten further as nervous banks become increasingly reluctant to lend to each other.
He said the “sheer uncertainty” and fear of what lies ahead among US banks in particular is driving wholesale interest rates back up to levels seen at the height of the summer credit crisis.
Appearing before the cross-party group of MPs in the Commons, Mr King cautioned that while retail and corporate borrowers had yet to feel the pinch from the collapse in the credit market, it was only a matter of time before the turmoil spread to the wider economy.
He said: “It’s the concern about what might lie ahead that is impacting on the banking system.
“In terms of borrowers, we haven’t yet seen a major impact, but we would expect to see some impact, both on mortgage borrowing and on corporate borrowing.”
Questioning the Governor and the Bank’s Monetary Policy Committee (MPC), MPs asked whether policy makers had “lost control” of interest rates amid the crises seen in financial markets, with risks of lenders upping borrowing costs despite base rate movements.
The MPC argued that its job was not to determine lender rates, adding that problems in the credit market had “done what the MPC might have had to do in terms of tightening” in the economy.
Mr King said the Bank was taking steps in conjunction with other central banks globally to help ease risks of a worsening in the credit crisis.
But he said there were concerns America was talking itself into a deeper credit squeeze, with banks fearing further fallout from the stricken sub-prime mortgage market.
“It’s not that people are worried about the magnitude of losses, but where they come from,” said Mr King.
MPC member Charlie Bean said it was estimated that only 20% of the likely losses of the sub-prime mortgage market had so far been declared by banks.
However, the £100bn losses thought to have been seen by banks was the equivalent only of a “bad day on the US stock market”, said Mr King.
The MPC was called to appear before the Commons Treasury Committee to discuss this month’s inflation report. The Bank signalled two rate cuts were on the way in 2008 as the economy faces high inflation and slowing growth. Inflation is predicted to hit the Bank’s 2% target within two years even if borrowing costs are reduced by 0.5% to 5.75%.
But Mr King admitted that soaring oil and commodity prices threatened to see inflation stray further from target.
