Bank Of England Moves On Credit Crunch

07.09.2007

The Bank of England's widely forecast rate freeze this month has been overshadowed by the monetary policy committee's (MPC) reaction to the recent market instability.

On Wednesday, the Bank of England took action to allow commercial banks to increase deposits making them less reliant on overnight borrowing markets, and so increasing the borrowing power of the City by £4.4 billion.

George Buckley, senior economist at Deutsche Bank, speaking on BBC Radio Five Live's Wake Up To Money, explained it was "understandable" that the Bank of England had not done more to ease the credit crunch hitting financial markets.

While the European Central Bank and the US Federal Reserve have been quicker to aid the markets, the Bank of England has garnered some criticism for not being so active.

Mr Buckley said: "There are certain inflationary pressures coming from upstream, maybe not in the consumer prices index any more which fell to below target, but there are still inflationary pressures out there and that's largely because of a lack of spare capacity in the economy.

"So it's understandable that the bank doesn't want to do too much because it was in the course of raising interest rates before this whole financial crisis happened."

Mr Buckley went on to explain that the increase in deposits will ease overnight rate problems, but the three-month rates still present a problem.

"The bank acknowledged this fact that it couldn't do much to bring three month interest rates down so that's where the problem still lies," he said.

"The risk is of course that banks and companies might actually have to pass through these higher interest rates into lending rates."

Meanwhile, Liberal Democrat Treasury spokesman Lord Oakeshott backed the Bank of England's stand-off approach.

"The banks and the hedge funds have been gambling and lost. It is absolutely right that taxpayers' money should not be used to bail them out," he told Radio Five Live's Wake Up To Money.

"When they're making hay while the sun shines they don't want anyone to interfere, they want to have complete freedom to make the biggest profits they possibly can. Then when the clouds come out or it starts raining suddenly they want the taxpayer to provide an umbrella."

Yesterday, the MPC took the step to issue a full statement about how it intends to track the markets following the 'credit crunch' that has hit the world's investors in the growing fall-out of the US sub-prime crisis.

Usually a rate freeze is accompanied by a single line confirmation with more details given when minutes of the meeting are released.

The MPC statement read: "In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally.

"It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.

"Against that background, the committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term."