UK: Record low interest rates

Bank of England set to cut rates to 300-year low

The Bank of England is expected to cut interest rates to two per cent - equal to their lowest level in more than 300 years.

The Telegraph,

26 April, 2012

The last time the rate hit such a low was 1951, and it has never been any lower since the Bank's foundation in 1694.

Some economists have forecast that the Bank could even lower the rate from three to 1.5 per cent.

The aggressive move, which comes amid rapidly worsening economic conditions, is aimed at preventing Britain from falling into a prolonged recession.

It comes as retailers slash prices in a desperate attempt to attract customers, as consumer confidence continues to fall and unemployment grows.

A dramatic reduction in the Bank's rate from 4.5 to three per cent last month, which left it at its lowest since 1954, has failed to revitalise lending to businesses or homeowners, prompting fears the downturn could be worse than forecast.

The pound hit a 13-year low against the dollar on Wednesday evening, before making back some ground overnight.

Mervyn King, the Governor of the Bank, told MPs last week: "We may need to cut Bank Rate more than we would otherwise have done. We will take whatever action we feel is necessary on interest rates to steer the economy back into calmer waters."

Willem Buiter of the London School of Economics, a former member of the Bank's Monetary Policy Committee, predicted the Bank rate would eventually be reduced to zero, and called for this to be implemented immediately.

Mr Buiter told BBC Radio 4: "Real economic data from all over the world keeps surprising on the down-side.

"Since we know we're going to get to zero, there's very little point in keeping the powder dry by delaying it."

He forecast that the Bank would cut the rate to 1.5 per cent on Thursday.

Martin Weale, the director of the National Institute of Economic and Social Research, agreed that a one per cent cut would do little to quell the economic crisis.

He said: "A one per cent cut is likely to have more impact than sacrificing a goat - but it is difficult to have any real conviction that it will do much good.

"It is widely recognised that the underlying problem is a lack of credit and it is quite probable that appreciably more money will need to be put into the banks before this problem is resolved," he told The Times.

George Buckley, the chief UK economist at Deutsche Bank, said: "They need to do something aggressive again, because of where the data's been taking us."

New data from the US and Europe showed that the service sectors in both areas shrank in November by the largest margin since records began.

Economists have forecast that the European Central Bank will also cut its interest rate on Thursday, with markets signalling the expectation of a 0.75 per centage point reduction to 2.5 per cent – the largest cut in its 10-year history.

Angela Knight of the British Banking Association told BBC Breakfast that it was important to think of the impact of interest rates on savers as well as borrowers.

She said: "The banks have got to balance the requirements of both savers and borrowers. Some of the rates will be passed down."

But she said there would still be "choices" in the market for savers. "Everything is related to that base rate but it is not necessarily all

BIS warns global lending contracting at fastest pace since 2008 Lehman crisis

International lending is contracting at the fastest pace since the onset of the financial crisis in 2008 as Europe's banks scramble to meet tougher rules.

The Telegraph,

3 June, 2012

The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from Italy, Spain and the eurozone periphery.

Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain.

The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage".

Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.

The International Monetary Fund said banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even in a "best-case scenario".

This could reach €3.8 trillion if Europe mishandles the debt crisis.

Tim Congdon from International Monetary Research said regulators were making a grave mistake by forcing banks to cut lending during a slump.

"What they are doing is frightening. If banks shrink their balance sheets, it destroys money. It causes a credit crunch and intensifies the recession. This is why we are facing a global slowdown," he said.

Alastair Clark, a member of the Bank of England's interim Financial Policy Committee, said last month that regulatory pressure may have gone too far, "inadvertantly" causing banks to restrict credit.

The BIS said French banks slashed their cross border assets by $197bn, and German banks cut by $181bn. The figures mostly predate the effects of the European Central Bank's liquidity blitz over the winter, which has had the effect of "Balkanizing" Europe's banking system. Analysts say the pace of withdrawal has since quickened.

Separately, the BIS said reserve accumulation by Asian central banks has jumped from $1.1 trillion to $6.4 trillion over the past decade, reaching levels that threaten to set off inflation and destabilise their economies.

The reserves – mostly in dollar and euro bonds – top 100pc of GDP in Hong Kong and Singapore, and 50pc in China, Malaysia and Thailand.

The effect is to distort the whole credit structure, promote the growth of "shadow banking", and store up all kinds of problems. "The expansion of the central banks' balance sheets has created dangers that require attention," the BIS said