Bank
of England set to cut rates to 300-year low
The
Bank of England is expected to cut interest rates to two per cent -
equal to their lowest level in more than 300 years.
26
April, 2012
The
last time the rate hit such a low was 1951, and it has never been any
lower since the Bank's foundation in 1694.
Some
economists have forecast that the Bank could even lower the rate from
three to 1.5 per cent.
The
aggressive move, which comes amid rapidly worsening economic
conditions, is aimed at preventing Britain from falling into a
prolonged recession.
It
comes as retailers slash prices in a desperate attempt to attract
customers, as consumer confidence continues to fall and unemployment
grows.
A
dramatic reduction in the Bank's rate from 4.5 to three per cent last
month, which left it at its lowest since 1954, has failed to
revitalise lending to businesses or homeowners, prompting fears the
downturn could be worse than forecast.
The
pound hit a 13-year low against the dollar on Wednesday evening,
before making back some ground overnight.
Mervyn
King, the Governor of the Bank, told MPs last week: "We may need
to cut Bank Rate more than we would otherwise have done. We will take
whatever action we feel is necessary on interest rates to steer the
economy back into calmer waters."
Willem
Buiter of the London School of Economics, a former member of the
Bank's Monetary Policy Committee, predicted the Bank rate would
eventually be reduced to zero, and called for this to be implemented
immediately.
Mr
Buiter told BBC Radio 4: "Real economic data from all over the
world keeps surprising on the down-side.
"Since
we know we're going to get to zero, there's very little point in
keeping the powder dry by delaying it."
He
forecast that the Bank would cut the rate to 1.5 per cent on
Thursday.
Martin
Weale, the director of the National Institute of Economic and Social
Research, agreed that a one per cent cut would do little to quell the
economic crisis.
He
said: "A one per cent cut is likely to have more impact than
sacrificing a goat - but it is difficult to have any real conviction
that it will do much good.
"It
is widely recognised that the underlying problem is a lack of credit
and it is quite probable that appreciably more money will need to be
put into the banks before this problem is resolved," he told The
Times.
George
Buckley, the chief UK economist at Deutsche Bank, said: "They
need to do something aggressive again, because of where the data's
been taking us."
New
data from the US and Europe showed that the service sectors in both
areas shrank in November by the largest margin since records began.
Economists
have forecast that the European Central Bank will also cut its
interest rate on Thursday, with markets signalling the expectation of
a 0.75 per centage point reduction to 2.5 per cent – the largest
cut in its 10-year history.
Angela
Knight of the British Banking Association told BBC Breakfast that it
was important to think of the impact of interest rates on savers as
well as borrowers.
She
said: "The banks have got to balance the requirements of both
savers and borrowers. Some of the rates will be passed down."
But
she said there would still be "choices" in the market for
savers. "Everything is related to that base rate but it is not
necessarily all
BIS
warns global lending contracting at fastest pace since 2008 Lehman
crisis
International
lending is contracting at the fastest pace since the onset of the
financial crisis in 2008 as Europe's banks scramble to meet tougher
rules.
3
June, 2012
The
Bank for International Settlements (BIS) said cross-border loans fell
by $799bn (£520bn) in the fourth quarter of 2011, led by a broad
retreat from Italy, Spain and the eurozone periphery.
Lending
to banks in the eurozone fell $364bn or 5.9pc, with drastic
reductions of 9.8pc in Italy and 8.7pc in Spain.
The
BIS's quarterly report said the decline in lending was "largely
driven by banks headquatered in the euro area facing pressures to
reduce their leverage".
Banks
must raise their core tier one capital ratios to 9pc by the end of
this month or face the risk of partial nationalisation. The global
Basel III rules are also pressuring banks to retrench.
The
International Monetary Fund said banks will have to slash their
balance sheets by $2 trillion (£1.6 trillion) by the end of next
year even in a "best-case scenario".
This
could reach €3.8 trillion if Europe mishandles the debt crisis.
Tim
Congdon from International Monetary Research said regulators were
making a grave mistake by forcing banks to cut lending during a
slump.
"What
they are doing is frightening. If banks shrink their balance sheets,
it destroys money. It causes a credit crunch and intensifies the
recession. This is why we are facing a global slowdown," he
said.
Alastair
Clark, a member of the Bank of England's interim Financial Policy
Committee, said last month that regulatory pressure may have gone too
far, "inadvertantly" causing banks to restrict credit.
The
BIS said French banks slashed their cross border assets by $197bn,
and German banks cut by $181bn. The figures mostly predate the
effects of the European Central Bank's liquidity blitz over the
winter, which has had the effect of "Balkanizing" Europe's
banking system. Analysts say the pace of withdrawal has since
quickened.
Separately,
the BIS said reserve accumulation by Asian central banks has jumped
from $1.1 trillion to $6.4 trillion over the past decade, reaching
levels that threaten to set off inflation and destabilise their
economies.
The
reserves – mostly in dollar and euro bonds – top 100pc of GDP in
Hong Kong and Singapore, and 50pc in China, Malaysia and Thailand.
The
effect is to distort the whole credit structure, promote the growth
of "shadow banking", and store up all kinds of problems.
"The expansion of the central banks' balance sheets has created
dangers that require attention," the BIS said
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