Sir Mervyn King issues gloomy financial forecast

 

Bank of England Governor Sir Mervyn King has said he is "pessimistic" over the chances for a eurozone recovery and warned Britain is still not halfway through the financial crisis.

In a gloomy Treasury Select Committee hearing, Sir Mervyn braced Britons for at least another five years of pain as he saw no sign yet of an end to the global financial woes.

The Bank chief told MPs he was "struck" by the speed at which the economic outlook was deteriorating as the eurozone crisis deepened, with conditions now worsening in previously booming areas such as Asia and other emerging markets.

He said he was "pessimistic and particularly concerned" as the problems in Europe continue without any decisive action.

Sir Mervyn added nobody expected the financial crisis that began in 2007 to have lasted so long, but said: "I don't think we're halfway through it".

He added: "My estimates of how long it will take to recover is expanding all the time."

There was little sign of further help for borrowers as Sir Mervyn argued that interest rate cuts would do little to help UK recovery efforts.

In response to recent calls from the International Monetary Fund (IMF) to slash rates to lift Britain out of its double-dip recession, Sir Mervyn said an interest rate reduction would fail to lead to widespread cuts in borrowing costs and could instead damage small lenders.

He said if interest rates - which have been held at a record low of 0.5% - were reduced further, it would risk hurting building societies by squeezing their already tight interest margins.

He confirmed the Bank had "not ruled out" a reduction of rates below 0.5%, but added that in view of multibillion-pound measures being taken to boost bank lending, "a bank rate cut won't make a difference".

Sir Mervyn assured MPs that efforts being taken to pump cash into the banking system would encourage banks to lend to households and businesses.

He promised the terms of the scheme would be so attractive it would "hit banks in the face".

MPs heard the so-called funding for lending scheme will be launched in "a very few weeks".

Details are being finalised this week before being run by the European Commission to ensure it does not breach State aid rules.

There have been concerns since the scheme was announced that it will do little to boost lending, with banks hoarding cash amid the current eurozone crisis and demand for borrowing low among businesses.

Sir Mervyn admitted there was "not enormous" take-up last week among banks for its first monthly auction under a six-month loan facility programme.

However, he said it was important the cash was there for banks to tap into and said the new funding for lending operation would offer the incentive needed to get banks lending.

"If you want to encourage banks to change their behaviour, better than to have a discussion is to give them a financial incentive - that's what this scheme will do," he said.

The Bank is launching schemes worth more than £100 billion to help kick-start lending, but MPs questioned whether policymakers had been too slow to act.

Sir Mervyn hinted that there would be further moves to boost lending this week, with the Bank widely expected to use its financial stability report on Friday to recommend plans to relax rules requiring banks to hold large amounts of cash as a buffer.

This would free up billions of pounds held by banks in order to get credit flowing.

Sir Mervyn and fellow members of the rate-setting Monetary Policy Committee also signalled to MPs that they stood ready to increase quantitative easing to pump more cash into the economy.

Minutes of the June rates meeting revealed four of the nine-strong MPC - including Sir Mervyn - were narrowly outvoted on expanding QE above the current level of £325 billion.

PA

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