Business | Economy
King could abandon bank-aid reticence as recession worsens
Bank of England Governor Mervyn King may abandon his reticence to shore up the financial system as the economy slides deeper into a recession.
- Bloomberg
- Published: 23:35 January 5, 2009
London: Bank of England (BoE) Governor Mervyn King may abandon his reticence to shore up the financial system as the economy slides deeper into a recession.
With the central bank set to cut the UK's key interest rate to the lowest in history this week, King may soon be forced to follow the Federal Reserve and pursue other ways to pump money into an economy contracting for the first time since 1991.
King's first course of action will probably be to expand the £200 billion-($290 billion) programme that allows banks to swap illiquid securities for government debt, economists say. That would suggest he will be more aggressive in helping banks after criticism from executives and former policy makers that he was too focused on the dangers of reckless lending.
"The balance between moral hazard and doing what's necessary to get the economy back on track is shifting," said Nick Kounis, chief European economist at Fortis in Amsterdam and a former UK Treasury official. "King has made a big deal in the past about not being too generous, and it would be quite a big U-turn for him."
King's Monetary Policy Committee will on January 8 reduce its main rate to 1.5 per cent from two per cent, according to the median of 50 forecasts in a Bloomberg News survey of economists.
That would be the lowest since the bank was founded in 1694 to finance King William III's war against France. The European Central Bank's benchmark stands at 2.5 per cent. Rates in the US and Japan are close to zero.
King has been under fire since the credit crisis started in 2007 for being too slow to help the banking system. Lawmakers criticised the BoE, along with the government and regulators, for not doing enough to soothe the market tensions that led to the collapse of Northern Rock.
In September, King refused to extend the Special Liquidity Scheme beyond its original October deadline until the collapse of Lehman Brothers Holdings forced him to reverse his decision. The program now runs until January 30.
King "must shoulder some of the blame" for the near-collapse of mortgage lender HBOS in the subsequent market turmoil, Keith Skeoch, chief executive officer of Standard Life Investments, said in September.
Former policy makers Charles Goodhart and Willem Buiter have said it was a mistake for King to put any deadline on the liquidity programme.
"I would hope they'll be more generous," said Michael Saunders, chief Western European economist at Citigroup. in London.
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