UK economy shows signs of recovery - governor
Bank of England raises spending on bonds again
November 25, 2009
By Bloomberg and Sapa-AP
A recovery in the UK economy was emerging after its longest recession on record, Bank of England governor Mervyn King said yesterday.
"We are encouraged by signs that a recovery will soon be under way," King told legislators in London. "Looking ahead the economy continues to face profound challenges."
The Bank of England is keeping the door open to more emergency policy action, with King saying on November 12 that he had an "open mind" on whether to expand its bond purchase programme further.
The British economy's 0.4 percent contraction in the third quarter leaves it lagging behind France, Germany, the US and Japan in exiting the global recession.
The bank increased spending on bonds to bolster growth to £200 billion (R2.5 trillion) this month, the third raise since the programme started in March.
The recession meant the level of spending was lower than it was at the start of last year, creating spare capacity in the economy and the labour market, King said. Other "powerful forces" restraining the economy included banks seeking to cut leverage, uncertainty among companies and workers about profits or income and the lack of a full recovery in demand for British exports.
"These forces will act to restrain spending for a considerable period," he said.
While that would eventually drag inflation down, consumer prices were likely to "rise sharply" in coming months amid rising petrol costs and the reversal of last year's reduction in value-added tax.
"But these are price level effects," he said. "It is not sensible for monetary policy to respond to these types of effects as they will influence measured inflation only for a year and policy does not have much traction on inflation over such a short time horizon."
Meanwhile, the Bank of England revealed yesterday that it had lent £61.6bn in emergency funding to two British banks to save them from collapse at the height of the financial crisis a year ago.
It was the first time the bank has detailed the level of support it provided to the Royal Bank of Scotland (RBS) and HBOS in October and November last year, when the financial system froze in panic in the wake of the bankruptcy of Lehman Brothers. It added that the money was paid back by January.
King told legislators that the funding "was to prevent a loss of confidence spreading through the financial system as (a) whole".
The bank also said it had carefully considered the public interest case for disclosure but decided that the assistance should only be revealed "once the bank considers that the need for secrecy has ceased".
RBS is 84 percent owned by the state after last year's bailout and has signed up for a government insurance plan to protect against losses on toxic assets.
HBOS was taken over by Lloyds Banking Group and the combined group is 43 percent owned by the taxpayer. Lloyds has shunned the government's asset protection scheme, announcing plans to raise capital from its shareholders instead.
|
|
