King fears asset decline may spark ‘credit squeeze’
Bank of England governor Mervyn King said there’s a risk a further drop in asset prices will lead to more deterioration of credit conditions.
By Agencies |
LONDON: Bank of England governor Mervyn King said there’s a risk a further drop in asset prices will lead to more deterioration of credit conditions.
“Market fears about the possibility of further movements in asset prices might impair the balance sheets of the banking system in the US, which would lead to a classic credit squeeze,” King told UK lawmakers on Thursday. “This is a risk rather than something that’s actually happened yet,” he said.
The world’s biggest banks have written down more than $50 billion on credit-related losses and UBS, Citigroup and Merrill Lynch fired their chief executives. The Bank of England on on Thursday joined the European Central Bank and the Federal Reserve in moving to stem a renewed rise in lending rates, offering banks emergency funds with longer repayment terms.
Borrowing costs have soared as banks hoard cash before the end of the year on concern losses from the collapse of the US subprime mortgage market will spread, keeping lenders from offering money to all but the safest borrowers. “Continuing fragility in the banking system” has increased the risk that money markets will “tighten” at year end, the bank said on Thursday.
The cost of borrowing pounds for three months rose 1 basis point to 6.6% on Thursday. That’s 85 basis points more than the Bank of England’s benchmark rate and the highest since September 18.
Fed vice-chairman Donald Kohn on Wednesday helped spark a stock- market rally when he said market “turbulence” may reduce credit to businesses and consumers, reinforcing investors’ expectations the Fed will cut interest rates again next month.
While the Fed has reduced its key rate by 75 basis points to 4.5%, the ECB and the Bank of England have kept their benchmark rates unchanged since markets seized up in August.
King and other British policymakers said on Thursday a reduction in lending will eventually hurt investment and consumer spending in the UK. “The big area of concern in my mind is consumption,” said Bank of England deputy governor Rachel Lomax. “It’s the most important component of demand and it’s most likely to be hit by tighter credit conditions,” added Lomax. King said corporate investment and commercial property are his biggest concerns.
The Bank of England is aiming to curb market lending rates and inflation at the same time. King said that “the near-term outlook for inflation and growth has become less benign” and policy maker Timothy Besley said there’s still “a fair amount of inflationary pressure out there”.
King drew a distinction between the jump in credit costs in August and September, stemming from the plunge in the US market for subprime mortgages, and the latest increase. Thje BoE governor said the first round was driven by concerns about banks’ liquidity and the latest by concerns about the health of their balance sheets.
“Although that fear has so far run well ahead of realised losses, it has the potential to lead to a further tightening in credit conditions,” said King. “The bank will continue to assess how these developments will impact on the outlook for inflation.”
“Market fears about the possibility of further movements in asset prices might impair the balance sheets of the banking system in the US, which would lead to a classic credit squeeze,” King told UK lawmakers on Thursday. “This is a risk rather than something that’s actually happened yet,” he said.
The world’s biggest banks have written down more than $50 billion on credit-related losses and UBS, Citigroup and Merrill Lynch fired their chief executives. The Bank of England on on Thursday joined the European Central Bank and the Federal Reserve in moving to stem a renewed rise in lending rates, offering banks emergency funds with longer repayment terms.
Borrowing costs have soared as banks hoard cash before the end of the year on concern losses from the collapse of the US subprime mortgage market will spread, keeping lenders from offering money to all but the safest borrowers. “Continuing fragility in the banking system” has increased the risk that money markets will “tighten” at year end, the bank said on Thursday.
The cost of borrowing pounds for three months rose 1 basis point to 6.6% on Thursday. That’s 85 basis points more than the Bank of England’s benchmark rate and the highest since September 18.
Fed vice-chairman Donald Kohn on Wednesday helped spark a stock- market rally when he said market “turbulence” may reduce credit to businesses and consumers, reinforcing investors’ expectations the Fed will cut interest rates again next month.
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While the Fed has reduced its key rate by 75 basis points to 4.5%, the ECB and the Bank of England have kept their benchmark rates unchanged since markets seized up in August.
King and other British policymakers said on Thursday a reduction in lending will eventually hurt investment and consumer spending in the UK. “The big area of concern in my mind is consumption,” said Bank of England deputy governor Rachel Lomax. “It’s the most important component of demand and it’s most likely to be hit by tighter credit conditions,” added Lomax. King said corporate investment and commercial property are his biggest concerns.
The Bank of England is aiming to curb market lending rates and inflation at the same time. King said that “the near-term outlook for inflation and growth has become less benign” and policy maker Timothy Besley said there’s still “a fair amount of inflationary pressure out there”.
King drew a distinction between the jump in credit costs in August and September, stemming from the plunge in the US market for subprime mortgages, and the latest increase. Thje BoE governor said the first round was driven by concerns about banks’ liquidity and the latest by concerns about the health of their balance sheets.
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“Although that fear has so far run well ahead of realised losses, it has the potential to lead to a further tightening in credit conditions,” said King. “The bank will continue to assess how these developments will impact on the outlook for inflation.”
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