King And Darling Criticises Bank’s Lending Habits
Bank of England governor Mervyn King has warned home owners that mortgage rates may rise even without another increase in the Bank’s base rate. He’s already correct because Abbey and Bank of Scotland have already made increases to some of their products, and Halifax are expected to follow suit. Ed Stansfield of Capital Economics said: “The longer the credit squeeze goes on, the more likely it is that all mortgage rates will rise. There is no reason to think the scale of rises announced today represents a ceiling.”
Mr King said that the credit crunch that has caused such turmoil on the world’s financial markets could affect the Bank’s recent forecast for inflation, which last month indicated that a further rate rise might be needed. He said that the impact of the credit crisis on the wider economy was not yet known. His report added: “Interest rates are a flexible tool and can be adjusted when necessary. If, in the wake of a shock to the financial system, the terms on which the financial system extends credit to the private sector become less favourable, borrowing and overall demand would weaken. Other things being equal, that would lower the inflation outlook.” That appears to be a hint that interest rates could be taken down in the next month or two, but nothing is guaranteed.
Mr King was unhappy with the way the banks had lent in a risky and reckless way, and it seems that banks will probably increase mortgage rates to compensate for their losses elsewhere. Although then Bank’s base rate has traditionally controlled the cost of mortgages, this appears to no longer be the case.
Chancellor of the Exchequer, Alistair Darling, also has harsh words for lenders and borrowers alike. Borrowers, he said, “need to ask themselves, ‘can I repay this?’ and lenders need to ask themselves, ‘if it goes wrong can I get it back?’ Institutions, he added, should open their eyes and ask questions of an apparently fantastic way of money like how is the money being made and what risks are involved?
Mr Darling said the problems in the international banking markets were now affecting consumers in the UK. He said: “It’s a different aspect of the same issue. One of the things that happens with low interest rates is that banks look around for better returns. Institutions have in some cases been prepared to lend top people without checking if they were ever going to repay it.” He called for a returned to “good old-fashioned banking”.
Meanwhile Mr King said he wished to maintain economic stability, saying: “That is done by setting interest rates in order to meet the 2% target for inflation. Interest rates are a flexible tool and can be adjusted quickly when necessary.'
Although 80% of polled by the news agency Reuters last week forecast that interest rates’ next movement will be downwards, Mr King warned no one to count their chickens as UK economic growth may need to slow down to keep inflation on target.
Published on September 23, 2007
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