Wednesday, Mar 26, 2008
Economic impacts on house prices
Reuters: Bank's King says credit crunch now in new phase
The credit crunch has entered a new and difficult phase but policymakers in Britain still have to balance slowing growth versus rising inflation, Bank of England Governor Mervyn King said on Wednesday.
Posted by alan @ 10:33 AM (1071 views) Add Comment
15 Comments
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1. geed said...
"King said it was important that higher inflation did not become entrenched and interest rate policy would have to reflect that risk as well as manage the slowing in the global economy." So this means no more rate cuts to ward of inflation?
"King said the BoE stood ready to provide liquidity to financial markets as needed and was working with the commercial banks to seek a resolution to the crisis." But doesn't this liquidity mean even more inflationary pressures as the BoE essentially is printing more money for the commericial banks? So King is contradicting himself?
"Such a solution, he said, should be paid for by shareholders in the banks who took risks, rather than taxpayers." hoorah, so this means banking stocks are to plunge again?
2. Icarus said...
Er... what's the new phase?
3. Fools said...
I think you will find that King has been contradicting himself since he famously stated that he wasn't going to bail out banks pre Northern Rock.
4. uncle tom said...
Quote: "So this means no more rate cuts to ward of inflation?"
This is where I suspect he is going. Sterling is weak, and some developed economies are raising rates.
Another angle that does not seem to have been highlighted is that if the BOE cuts rates, then those with tracker mortgages pay less, which is good for them. but as the mortgage providers are suffering at the moment, and without BOE help can't source cheaper funds if the rate is cut, it would mean that those with variable rate mortgages would see their rates raised to compensate for the discount to the trackers.
As those with tracker deals are generally in less financial stress than those on variable rates, it would not be a particularly clever thing to do, and the mortgage providers advice to the BOE is probably to hold steady at the moment, unless the BOE is prepared to loan them lots more cheap dosh...
5. C'mon Correction said...
I agree, apart from the tracker mortgages, mortgage rates won't follow the base rate anymore as bank's simply can't afford to let it. All lowering base rates will do is encourage more reckless borrowing and not help either the banks or their customers stuck on their mortgage rates.
If the market can't stand on it's two feet after all the money that has been pumped in recently, then we really are in desperate times and a depression looks inevitable - central banks/governments of US and UK may be able to delay it, but that'll only compound the problem in the long-term.
6. happyrenterz said...
I think the BoE will save its rate cut ammo for when deflation of house prices and the associated recession kicks in. The USA is a year or 2 ahead of us in this respect, with their hpc. Inflation is definitely out there as reported at 8.7% in China and South Africa at 9.4% a 5 year high. Developing countries seem to be getting hit earlier by oil prices, but these will filter through to the UK and Europe.
7. cornishman said...
""The MPC can have little effect on the short-term path of inflation," he said. "What is crucial is that the pick up proves to be temporary, just as the rise in inflation last year was."
- so the rise in inflation last year was temporary was it? This year's rise is something different?
8. happyrenterz said...
9. happyrenterz said...
Below is FT's take on M King' speech. The FT have highlighted the point about the BoE is willing to accept mortgage backed securities for loans to banks, as the Fed has done. This is only a temporary measure tho since the loans need to be repaid. The banks need to sort out a long term solution themselves. It should stop Northern Rock style banking collapse (which is good in my view) but the long term problem is that banks finding it difficult to pass on their mortgage products, so banks will remain wary about lending in future. Party is over for these fat cats.
http://www.ft.com/cms/s/0/d0071df4-fb28-11dc-8c3e-000077b07658.html
I have pasted it here because FT often remove their articles.
King to consider special help for UK banks
By Chris Giles, Economics Editor
Published: March 26 2008 12:08 | Last updated: March 26 2008 12:23
Mervyn King indicated on Wednesday that the Bank of England was poised to take a revolutionary step and buy or swap illiquid assets on banks’ books for cash or liquid assets as way to find a “longer-term resolution” to the problems faced by British banks.
The Bank governor also indicated the Bank was more predisposed to cutting interest rates now than in February.
Commenting on the “fragility” that exists in the financial system, Mr King said there was an “overhang on banks’ balance sheets of assets in which markets have closed”
“These assets cannot now be sold or used to secure funding in the market – they are difficult to finance. That has created uncertainty about the strength of banks’ financial positions”.
In the short-term, he said the Bank would continue to lend against mortgage-backed securities and other asset-backed securities where markets are closed, but he added that such lending, while “a useful bridge to a longer-term solution” can “be only a temporary measure”.
He was not specific about the longer-term resolution, since he said “it is too soon to say where these discussions will lead”, but he indicated more radical moves were necessary because “it is unrealistic to assume that markets for many asset-backed securities are likely to re-open speedily or, when they do, to their previous levels of activity”.
Mr King’s comments before the Treasury Committee come a week after shares in HBOS, the owner of the Halifax building society and the country’s largest mortgage lender, fell nearly 20 per cent on rumours it had sought emergency funding from the Bank of England.
The Bank of England was forced to deny the rumours and the FSA has launched a criminal investigation into the distribution of the claims. But the share price response shocked senior banking executives and regulators and led to a plea for help for the industry.
The Financial Times reported last week that discussions in central banks around the world include the purchase of mortgage-backed securities or swapping illiquid assets for UK government bonds, a move similar in effect to outright purchase.
But Mr King stressed there were two principles he would insist upon if the Bank was to take illiquid assets off commercial banks’ books to improve their financial positions.
“First,” he said, “the risk of losses on their lending should remain with banks’ shareholders”. This implies the Bank would only accept assets at well below face value, or would insist on banks’ indemnifying taxpayers for the credit risk they would adopt if they took hold of the assets.
“Second,” he added, “a longer-term solution must focus on the overhang of assets and not subsidise issues of new assets”. Mr King is keen not to allow another frenzy of lending and it implies the Bank would not be willing to take any new mortgage-backed securities on its books.
The second condition would be difficult to achieve in full, since improving banks’ finances would improve their ability to lend compared with the extremely strained current conditions. Any action could be perceived as a subsidy, but the Bank governor‘s words indicated he would not be willing to assist banks with new lending.
The governor made it clear that the problems for banks were not confined to the UK. “There is concern in all financial markets around the world that fragility remains today,” he said.
Mr King made it clear that he wanted to separate the financial crisis from monetary policy and said that the two interest rate cuts so far had offset tighter conditions in mortgage markets, so monetary conditions were broadly unchanged.
Asked whether current market conditions made the Monetary Policy Committee more predisposed to a cut in interest rates, he replied: ”Yes”.
10. mark wadsworth said...
C'mon, altogether now, "Ths is not the end. It is not even the beginning of the end. It is not even the end of the beginning. It's the middle bit of the beginning or it could be the end of the trailer. Or it could be that bit between the adverts and the main feature"
11. Icarus said...
Merv - assets 'in which markets have closed' and 'which cannot now be sold' aren't assets - they're worthless.
12. bystander said...
"Mr King made it clear that he wanted to separate the financial crisis from monetary policy and said that the two interest rate cuts so far had offset tighter conditions in mortgage markets, so monetary conditions were broadly unchanged."
......these two cuts have done nothing, but reduce the interest rate on my savings. The lenders aren't lending and the mortgage market has siezed up.
Asked whether current market conditions made the Monetary Policy Committee more predisposed to a cut in interest rates, he replied: ”Yes”.
...........So more of the same. Thanks Merv.
13. Randomkevlar said...
In the words of Michael Stipe of REM "Its the end of the world as we know it, but I feel fine"
14. Ijjhall said...
Over the weekend David Smith was boasting in his Times piece with anonymous 'sources' in support that in the meeting between King and the Banks last week King had given the banks 'want they wanted to hear' in terms of the granting of mortgage backed securities and liquidity assistance. Now it seems this is not the case or if so the risks to be shouldered not by the taxpayer but by shareholders. This must be frustrating to hear - when added to the relatively hawkish comments on the continuing inflation threat - for the quick fix/bail out merchants. Perhaps we should be grateful that for all the past slackness policy is in the hands of someone reasonbally measured like King then a British version of the head of the US Fed no doubt fervently wished for by those such as Danny Blanchflower etc..
15. Fed Up said...
Just another article in which 'experts' are allowed predict rate cuts if not in April, but May. The consequence is a further talking down of Sterling.