MPC member warns banks not to stunt recovery

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British banks run the risk of intensifying the recession by "undershooting" on their lending, a mem-ber of the Bank of England's Monetary Policy Committee warned yesterday.

Tim Besley, an independent economist who sits on the interest rate-setting body, told an IMF conference in remarks published yesterday that bank lending had become a key issue in the battle against the recession.

"The big issue now is how to prevent some kind of undershooting in the adjustment process," he said. "Banks are now being extremely cautious in their lending strategies as they try to shrink their balance sheets."

Mr Besley added: "The big policy issue – and I think it's again a global issue – is how to establish an orderly process of deleveraging."

The Governor of the Bank of England, Mervyn King, issued a similar warning to MPs during his testimony to the Treasury Select Committee on Tuesday. While the pre-Budget report and the cut in VAT grabbed the headlines, Mr King warned that any fiscal boost needed to be accompanied by action on lending.

"I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to get lending in any normal sense," he said. "That is more important than anything else at present."

The MPC will announce its next decision on rates next Thursday. Most economists expect a further cut of a half percentage point in Bank rate to 2.5 per cent next week, which will leave them at levels not seen since 1952.