Page last updated at 11:33 GMT, Wednesday, 26 March 2008

King pledges further market help

Mervyn King
Mr King expects inflation to hit 3% this year

Bank of England governor Mervyn King has warned MPs that the credit crunch is having a bigger effect on the UK economy than previously thought.

He pledged to pump more cash into money markets to try and restore confidence in the UK's financial system amid the credit squeeze.

The promise comes after the Bank put an extra 5bn into the market last week.

Mr King also predicted that house prices would be "broadly stable" over the next few years, which he welcomed.

Across the world, confidence in financial markets is fragile
Mervyn King, Bank of England governor

He said that a slowdown in the housing market would eventually make houses more affordable for first-time buyers, as the ratio of wages to house prices returned to more normal levels.

Activity and prices had continued to weaken in both the residential and commercial property sectors, he added.

"That stems in part from the continued tightening of credit conditions reflecting the turmoil in financial markets," Mr King said.

'Matter of concern'

The governor told the Treasury select committee that the global financial crisis had "moved into a new and different phase".

It was possible to detect more concern among the MPC members about continued financial market difficulties
Peter Newland, Lehman Brothers

"Across the world, confidence in financial markets is fragile. It is not that banks, at least in the UK, have made loans that are likely to result in unsustainable losses," he said.

"The heart of the problem is not in the real economy. It is in the financial sector itself."

Uncertainty about the strength of banks' financial positions has grown because of their difficulties to secure funding against assets they hold, he said.

Despite the billions being pumped into money markets, the Libor rate - at which banks lend to one another - remains high.

Mr King said that it was a "matter of concern" that the efforts by central banks had so far failed to stem the problem.

Extra cash

The Bank of England would continue to offer extra money in the markets as a short-term way of boosting confidence in the system, he added

However he said that longer-term solutions would be discussed with UK banks.

Chief executives from HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS held a meeting with Mr King last Thursday.

The governor was understood to be alarmed by the slump in the HBOS share price on the back of erroneous rumours that the leading mortgage bank was in financial difficulties.

HBOS shares later recovered to finish the week ahead.

Fuel impact

Mr King told MPs that inflation was likely to rise to about 3%, driven by soaring oil and food costs, and rising household energy bills as well as the weaker pound.

However he was confident that it would come closer to the government's target of 2% in "the next couple of years".

Figures last week showed the official measure of the cost of living reached a nine-month high of 2.5% during February.

Some analysts said that the comments of Mr King and other members of the Bank's Monetary Policy Committee hinted towards an interest rate cut next month.

"It was possible to detect more concern among the MPC members about continued financial market difficulties," said Lehman Brothers analyst Peter Newland.

Tighter lending conditions had made the Bank more inclined to cut interest rates, Mr King said but he added that there were no plans to follow the US Federal Reserve in aggressively cutting interest rates.

Problems in the UK economy - especially in the housing and labour markets - were not as bad as across the Atlantic, he added.

Official retail sales showed that spending has been "surprisingly resilient" so far in 2008, Mr King added.

Another member of the Bank's Monetary Policy Committee, David Blanchflower, said he was concerned that the labour market could also weaken in coming months.




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Mervyn King's house price prediction



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