Credit Crisis Pressuring For Interest Rate Drop
A report released this week paints a gloomy picture of the economy, and strengthens the arguments for interest rate cuts, putting pressure on members of the Monetary Policy Committee. On 4 October, the Committee voted to maintain the 5.75% Bank Rate paid toward commercial bank reserves.
The twin signs of weakness caused a backlash for the Bank of England and the UK authorities for mishandling the credit squeeze. The run on the bank is "what you would expect in a 'banana republic' ", according to the customarily mild-mannered Mr Lambert, director general of the CBI. "That one should have happened in a mature and prosperous country like the UK is almost unimaginable."
Mr Lambert stated that the UK's financial regulation with the Treasury, the Bank and the Financial Services Authority operating in separate roles had "been found wanting under fire".
He criticized Mervyn King, the Bank governor, who blamed the Northern Rock crisis on the company law. Mr Lambert said: "You don't wait for the cinema to catch fire before you check out whether the fire precautions are going to work," said Mr Lambert.
The Northern Rock fiasco scared smaller banks who are not able to borrow without difficulty in the interbank market.
This backlash is expected to filter through the market causing tighter lending and borrowing restrictions, especially for consumers who want to borrow mortgages and loans. Even if people qualify for loans and mortgages, they may be forced into secondary markets to find an affordable financial product - or a smiling face.
Published on October 10, 2007
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