King warning over funding crisis (From Haringey Independent)

King warning over funding crisis

12:16pm Thursday 11th September 2008

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Bank of England Governor Mervyn King warned there was no magic wand to solve the current mortgage drought crippling the economy.

Next week the Bank publishes proposals on a permanent successor to its current Special Liquidity Scheme - which allows banks to shore up their balance sheets by swapping riskier assets for safer Treasury bonds.

But the Governor said any new scheme would not provide long-term funding for banks who have raised billions in a bid to strengthen their finances since the credit crunch hit.

"I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending," he said.

The lack of mortgages in the wake of the credit crunch has sent the housing market into a tailspin, with a damaging knock-on effect on the wider economy.

Bank of England figures last week showed just 33,000 mortgages were approved for house purchase during July - a record low and barely a quarter of the 114,000 approved 12 months earlier.

Mr King said the UK faced "testing times" as the Bank's Monetary Policy Committee also grapples with inflation at more than double its 2% target due to surging oil, food and energy costs.

These inflation risks have prevented it cutting rates in recent months to help the economy. "In the UK we face a difficult, but temporary, period during which inflation will remain high for a while and output growth at best weak," he told MPs on the Treasury Select Committee.

Official inflation currently stands at 4.4% and is expected to rise to around 5% - prompting another open letter to Chancellor Alistair Darling next week to explain why the cost of living is more than 1% above target.

Most economists, meanwhile, predict the UK will be in a recession by the end of this year - defined as two successive quarters of contraction - as the credit clampdown "bears down" on the economy.

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