Bank ‘prints’ £75bn and cuts interest rates in half

The Bank of England announced yesterday that it would begin “printing money” on a massive scale in an unprecedented effort to kickstart growth.

The Bank said that it would pump £75 billion into the economy as it halved interest rates to 0.5 per cent in a last-ditch effort to combat the slump. It added that there was no limit to how far it could go down this untried route of quantitative easing.

Mervyn King, the Governor, said that it was very unlikely that interest rates could go any lower. With rates close to zero, the bank has been forced to resort to a drastic new strategy to try to breathe life into the economy.

After Alistair Darling gave permission for up to £150 billion of new money to be created – equivalent to 10 per cent of the entire economy – the Monetary Policy Committee swiftly approved detailed plans to inject an immediate £75 billion to boost the amount of cash and credit flowing in the economy. The figure is much bigger than expected by most of the City.

The Bank said that it would pump in the money over the next three months by buying up huge quantities of bonds – government and business IOUs – from high street banks.

It hopes that this will stimulate new lending and drive down lending charges to consumers and businesses.

Despite Mr King’s assurances, City experts warned that the plan was fraught with uncertainties and risks. Critics point to the experience of Japan, where quantitative easing was attempted early in this decade with scant success.

George Osborne, the Shadow Chancellor, described the move as “a leap in the dark”. Vince Cable, the Liberal Democrat Treasury spokesman, said that the new strategy was now “the only clear option”, but cautioned that the Bank would have to be on its guard against the danger that printing money sparked high inflation. continues here

Pound plunges after Bank of England governor Mervyn King declares 'We ARE in a recession'

The pound plunged to a five-year low last night after Bank of England governor Mervyn King warned for the first time that Britain had entered a recession.

In his first public comments following a month of unprecedented turmoil, Mr King insisted that an extraordinary set of dangers are facing the economy and said it would be a 'long march' to recovery.

Not since the First World War has the banking system come so close to collapse, he said.

His comments sent the pound tumbling against the dollar by 3 percent $1.71 to a five-year low of $1.62.



And the governor hinted that further interest rate cuts could be made in the coming weeks as the Bank of England tries to prop up the economy.

In a speech to business leaders in Leeds, Mr King said: 'Taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand.

'Indeed, it now seems likely that the UK economy is entering a recession.'

The supply of finance to firms has 'ground to a halt', families' access to credit has suffered a 'severe blow' and housing market weakness is 'likely to continue', he said.

Meanwhile, disposable incomes have already been pushed down because of rising food and energy prices.

Mr King went on: 'We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions.'

His warnings will further damage Gordon Brown's claims to have put an end to 'boom and bust' and cast serious doubts over the Prime Minister's hopes of spending his way out of recession.

However Mr King struck a note of optimism by suggesting that this month's £37billion bail-out of Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland was the moment when 'we turned the corner' in the financial crisis.

Yet the country will never return to the days of free and easy lending that prevailed until August last year, he warned.

This clashes with assurances from ministers that firms benefiting from taxpayer cash will supply at least as much credit as they did in 2007.

Mr King's intervention came as the respected National Institute of Economic and Social Research warned Britain is likely to suffer a recession lasting at least a year.

The gravity of the situation was underlined by separate figures showing industrial production has dropped in the past month.

Confidence among manufacturers is now at its lowest ebb since the early 1980s, the Confederation of British Industry said.

Mr King has previously refused to speak of recession, but his decision to do so last night reflects the sharp plunge in Britain's economic fortunes over recent days.

A recession is defined as two or quarters of falling economic output. The last time this happened was under Conservative Prime Minister John Major in the early 1990s

The economic situation has become so dire that the Bank of England cut interest rates by a half point, to 4.5 per cent, at the beginning of October following similar moves by the U.S. Federal Reserve and European Central Bank.

Last night economists from NIESR published their report called The Great Crash of 2008. It warned there were no 'magic solutions' to prevent recession.

The research body, which counts the Bank of England and Treasury among its clients, said Britain entered recession over the summer and may not emerge until 2010.

Yet the Government can do little to ease the pain, NIESR said.

It gave short shrift to Mr Brown's pledges to spend his way out of recession, saying it will take a long time to bring forward investment plans.

Government borrowing could exceed £100billion, and this money will have to be paid back eventually, the report said.

Meanwhile banks are unlikely to heed Treasury calls for lending to be lifted to 2007 levels it added, calling this ministerial 'rhetoric'.

And NIESR said rate cuts were less 'powerful' than they used to be because banks are refusing to pass them on to customers. continues here

Two million could be out of work by Christmas, Bank of England warns

• No jobs left for school leavers
  
• Britain is already in a recession
• House prices could fall more than 30%
  
• Workers will not be getting a pay rise
• 
  

Around two million people will be unemployed by Christmas as the credit crunch bites, a key Bank of England policymaker warned yesterday.

Professor David Blanchflower said he predicts 2,000 people will lose their jobs every day over the next four months. 

This would take unemployment levels to their highest since Labour came to power in 1997.

For families up and down the country, redundancy would be devastating at a time of soaring household bills. 

Millions of people are barely coping with rising food, fuel and gas bills, and will be crippled if they lose their job - particularly if they are the sole breadwinner. 

Young people will also be affected, with 'no jobs' for hundreds of thousands of children when they leave school, he warned. 

In an interview, Professor Blanchflower, who is a member of the Bank's Monetary Policy Committee, gave a series of warnings about Britain's economic meltdown. 

He says that Britain is already in a recession which is in danger of being 'very serious and long-lasting' unless urgent action is taken.

And he admits his original forecast that house prices will fall 30 per cent might be 'optimistic' and the drop could be even sharper. 

And as a further blow to workers, he says those who keep their jobs will not get a pay rise, or will get one which is below inflation. 

His interview, with the news agency Reuters, will worry workers up and down the country who fear that their job is no longer safe. 

As one of the nine people who set interest rates every month, he is one of the most powerful economic voices in the country. 

Every week, more companies admit that they have had to sack staff in a bid to cope with the economic crisis. 

In the past few days, one housebuilder, Bovis, said it has cut 40 per cent of its staff and rival Taylor Wimpey has axed 900 jobs.


And to make things worse for those who lose their job, many will face an impossible struggle to get a new job because firms have 'stopped hiring'. 

Professor Blanchflower, an economics lecturer at Dartmouth College in the U.S., said: 'I am expecting to see a number of something like two million by the end of the year. School leavers are coming into the jobs market and there are no jobs for them. 

'People have to start to respond to the fact that we are in a recession and the danger is that we will be in a very serious and long-lasting recession unless we do something..' 

'I certainly think we are in negative growth now and I expect several further quarters.' 

He also launched a veiled attack on his fellow members of the Monetary Policy Committee. At the last 11 meetings, Professor Blanchflower has voted to cut interest rates. But other members, including the Bank's governor Mervyn King, have largely ignored him, and voted to cut rates on only three occasions since October. 

He said: 'To sit and worry about inflation expectations and what is going to happen to those, rather than worry about the fact that the economy is going to go into a recession, seems to be misguided.' 

Tory Treasury spokesman Philip Hammond said: 'This is a startling prediction from a member of the Bank of England's Monetary Policy Committee. 

'If it turns out to be true, it will represent a meltdown in employment and yet more misery for families in the months ahead.' 

There is already evidence that unemployment is starting to rise sharply as bosses are forced to cut staff to cope. The latest figures from the Office for National Statistics show 60,000 became unemployed between April and June, raising the total to 1.67million. continues here

Bank of England warns: 'There's NOTHING we can do to stop the pain of prices soaring'

The Bank of England has warned it can do nothing to alleviate the pain of rapidly rising prices over the coming months. 

Governor Mervyn King signalled living standards will continue to be squeezed by inflation-busting increases on food and fuel well into 2009. 

Attempting to curb the rampant price increases by raising interest rates sharply could lead to an even more painful economic downturn, he said. 

Mr King made the comments in the Bank's annual report amid new evidence that the pressure on incomes is intensifying. 

The cost of products leaving UK factories rose 10 per cent in the year to June - the first double-digit increase recorded by the Office for National Statistics for 20 years. Food costs rose by 11.8 per cent, while prices for petroleum products rose by 34.2 per cent, the report showed - the largest increases on record. 

These are likely to feed into the prices paid by shoppers on the High Street, exacerbating Britain's inflation problem and the misery being felt by families. 

Gordon Brown said the recent rise in oil and food prices, coupled with the credit crunch, had caused 'unprecedented' problems around the world. 

The Prime Minister admitted families are feeling the pain of soaring costs 'every time they go to the petrol station or the supermarket'. 

He said the Government is considering taking steps to help families cope with the
rising cost of living, but declined to give any detail. 'We have a responsibility to help people through these difficult times, and yes we will consider extra measures,' Mr Brown said. 

Economists expect official figures today to show that the consumer prices index rose an annual 3.6 per cent in June. 

That would be the highest inflation reading since the summer of 1992, and well above the three per cent limit tolerated by the Bank of England.

But the Daily Mail's Cost of Living Index suggests the pain is even more acute for families across the country. 

The cost of a basket of key products soared an annual 17.8 per cent in July, the index shows. A household which spent £100 a week on food last year now needs to find another £18 a week, or £936 a year.

Meanwhile the annual average cost of driving a diesel car has surged by around £365, while the cost of heat and light is up by just over 14 per cent - £131 a year - taking it to £1,056. 

Mr King said he expects to have to write a series of explanatory letters to Chancellor Alistair Darling over the coming months as inflation repeatedly breaches the Bank's target. 

But he added that the Bank has been avoiding swingeing interest rate rises because this could drive the economy into an even steeper slowdown. 

Mr King said: 'We are now faced for the second time in less than two years with the prospect of a sharp, but temporary, rise in inflation, this time mainly from the impact of energy and food price rises. 

'In fact, it is likely that inflation will remain above three per cent until well into next year. 

'The Monetary Policy Committee can have little impact on the path of inflation in the short term. 

'It has not attempted to prevent inflation moving away from the target following the sharp rises in commodity prices. 

'To do so would have required a large increase in interest rates, with such a severe impact on output and employment that it would have risked inflation falling well below target further out.' 

Large rises in borrowing costs would also pile on the pain in the housing market, which is already heading for its worst slump in decades. continues here

'Greedy' banks push up mortgage rates
Edmund Conway and Harry Wallop

Banks and building societies have been accused of profiteering after official figures showed that they had raised millions of their customers' mortgage bills before an expected cut in interest rates by the Bank of England.

While a cut today should bring some respite for struggling home owners, analysis by The Daily Telegraph shows how banks have not only failed to pass on the previous cut, they have actually raised the average mortgage rate.

Moreover, financial experts warned that even if rates continued to fall this year, the majority of the 11.8 million mortgage holders in Britain were unlikely to see much benefit.

In the past few weeks 10 mortgage lenders, including the Royal Bank of Scotland, Alliance & Leicester and the country's biggest building society, the Nationwide, have increased some of their rates, despite the Bank cutting rates from 5.75 per cent to 5.5 in December.

Bank of England data shows that the average mortgage rate has been inflated. When interest rates were previously 5.5 per cent - in May last year - the average mortgage rate was 5.66 per cent but when rates moved back down to that level in December the average was 5.93.

For someone on a typical interest-only home loan of £150,000, this meant an increase of £33.75 on their monthly bill to £741.25.

Eddie Weatherill, the chairman of the campaign group Independent Banking Advisory Service, said: "Over the last decade the banks have used interest rate changes to massage their own rates......Article conts (-)