The Bank of England is concerned that the UK’s banking system is heading for a third wave of crisis that could snuff out fragile signs of recovery in the economy.
On Thursday the Bank surprised the City by announcing that it would pump an extra £50bn of new money into the economy despite recent stockmarket rallies.
Now the Guardian has learned that this increase in quantitative easing was driven by fears in Threadneedle Street that the credit crunch is still sucking the life out of the British economy and the banking sector remains in deep trouble.
The new mood of caution chimes with comments from business leaders yesterday, who warned that apparent green shoots in the economy had shallow roots.
Richard Lambert, director general of the CBI, said: “The fact is that for all the injections of taxpayers’ money, the credit markets are still not working properly.”
Bank of England officials are concerned that big banks now supported by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking Group, are struggling to increase lending volumes, as they had promised in return for help from the government.
The governor, Mervyn King, and several other members of the Bank of England’s monetary policy committee are said to be unconvinced by talk of green shoots that has helped propel the FTSE 100 share index up by more than 20% over the last month.
Fears of a false dawn echo the mood at the beginning of the year, when apparent recovery in financial markets was wiped out by a second wave of crisis led by RBS and Lloyds.
This week both banks again warned of sharp increases in bad loans to British business customers. RBS said yesterday it was seeing little sign of green shoots.
Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.
The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.
In return for support from the government, both RBS and Lloyds had pledged to increase lending to homeowners and businesses to compensate for declining foreign lending. Instead Stephen Hester, chief executive of RBS, said yesterday that demands for loans had contracted as customers “quite properly” try to reduce their borrowings as the recession bites. Full article on the Guardian.
If the Bank of England is preparing for a “third wave” then mainstreet better prepare for the worst…
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