Steadfast King expects recession
Bank of England governor Mervyn King praised the government for its “radical” steps to save Britain’s banking system, but in a speech last night warned that recession is now “likely”.
Mr King was fully behind Gordon Brown and Alistair Darling’s actions as he assessed their response to the liquidity crisis in an address to business leaders in Leeds.
“Radical action was necessary to ensure the survival of the banking system,” he said.
“And on the morning of October 8th that action was taken when the prime minister and chancellor unveiled a UK plan for recapitalising the banking system on which the Bank, FSA and Treasury had been working for a while.”
His gloomy assessment of the current situation came in his first public comments since the global financial system descended into turmoil.
Mr King said the crisis was “deeper seated” than initially feared and described it as one relating to “the solvency of the banking system”.
He warned that the government’s interventionist lending could be interpreted as a sticking-plaster strategy which conceals “the severity of the underlying problems” and puts off “the inevitable day of reckoning”.
But Mr King went on to argue the government’s actions had been justified because the fiscal response required by recapitalisation could not come from anywhere else.
“We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner,” he added.
The Bank governor was less optimistic about the immediate prospects for the British economy, expecting a recession next year, but said falling oil prices and the recapitalised banking system would support growth.
He also said the monetary policy committee (MPC) would remain committed to keeping inflation at its two per cent target, emphasising his determination to “reinforce” existing policy. Observers expect a cut from the current 4.5 per cent base rate when the MPC meets next month.
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