Can the Bank Save Us from Recession?

Article excerpt

Byline: Alex Brummer

BEFORE anyone cheers the Bank of England decision to lop a quarter pointoff interest rates too loudly, they would do well to read the small print. Thedrop in bank rate to 5.5 per cent was not an act of pre-Christmas benevolencebut a recognition that the economy sits on a precipice after a decade ofcredit-fuelled expansion.

The main weapon the Bank has to prevent this disaster is interest rates.Analysts who only a few weeks ago were predicting modest interest ratereductions now believe that the Monetary Policy Committee - which sets the costof borrowing - will have to bring rates as low as 4 per cent by the start of2009 if recession is to be averted.

Governor Mervyn King and the Bank are banks not given to hyperbole. But it isnow warning that a slowdown is under way and that it is likely to become worsewith surveys showing that spending by households and businesses is beingcurbed.

Even worse is the dire state of the wholesale money markets, where banks lendto each other. The result of years of foolish lending and widespread investmentin poor quality mortgages and other debts which went wrong has the banksscrambling for cover. In the short period since the Bank issued its InflationReport last month it notes 'financial markets have deteriorated and there hasbeen a tightening of credit to households.' When King and his colleagues soughtto ease this logjam this week by injecting some [pounds sterling]10billion into the wholesalemarkets, there was record demand for the cash and its offer was more than sixtimes oversubscribed. This provides clear evidence that the tremors, whichbegan with America's trailer park mortgages and spread to Northern Rock, arefar from over. …