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

There is no magic wand to solve the housing crisis, warns Bank of England chief Mervyn King

Mervyn King yesterday warned there was no ‘magic solution’ to Britain’s housing crisis as he cautioned ministers against US-style bailouts.

The Bank of England governor acknowledged the City was in its worst state since the 1930s, but that pouring public money into the mortgage market was fraught with risks.

Gordon Brown is known to be considering extending government guarantees for mortgages in an effort to increase availability on the high street.

Mr King’s comments came as fellow interest-rate setter David Blanchflower predicted thousands of workers could be laid off every week between now and Christmas as the nation’s economic output dives.

He warned there could be a ‘horrible surprise’ lurking around the corner, declaring he had a ‘doom laden’ view of Britain’s outlook.

In equally bleak testimony to Parliament’s Treasury Select Committee, Mr King said Britain faced ‘testing times’ as incomes are squeezed and the economy flirts with recession.

He said: ‘The prospects for growth in the short run have deteriorated, and inflation has risen.

'Financial conditions are worsening and the banking system as a whole remains short of capital. As a result, credit conditions have tightened and lending is being restricted.’

The Treasury has been considering kick- starting the mortgage market by backing loans with public guarantees.

Labour is under massive pressure to act as house prices register their steepest falls for decades.

The number of mortgages approved in July tumbled to a record low of 33,000 as banks hoard cash rather than lending it out.

But Mr King said the notion that there was a ‘magic solution’ to this credit collapse was ‘an illusion’.

Heavy government intervention is a risky path to take, he warned.

‘What that would do is totally undercut the incentive of private sector banks to get their own balance sheets back in order.’

Mr King’s comments come only days after the U.S. government announced the effective nationalisation of stricken home loan providers Fannie Mae and Freddie Mac.

The White House’s move has prompted demands for similarly decisive state intervention by the UK Treasury.

Former Halifax Bank of Scotland chief Sir James Crosby is currently conducting a review for the Treasury considering ways of shoring up the mortgage market.

Mr King will unveil a new facility to help cash-strapped lenders next week, but he said the Bank can only offer a term salve to the industry.

The governor welcomed the fall in oil prices, saying they may curb inflation, but signalled there were still considerable barriers to near-term rate cuts.

Fellow Monetary Policy Committee member Mr Blanchflower meanwhile reiterated calls for aggressive cuts in interest rates, warning the UK economy was in a critical state.

Gains in unemployment could exceed 60,000 a month before Christmas, he warned.
John Lewis yesterday revealed a 27 per cent slump in pre-tax profits to £108million in the first six months of the financial year.

The retailer warned of further pain ahead but said it would still be opening new outlets in the downturn.
The non-savers

Half of all workers will be forced to work into their late sixties or even their seventies because they are failing to save enough money, research reveals today.

Investment firm Scottish Widows found millions are not putting a penny aside towards their retirement, while others are saving money but not nearly enough to pay for a decent pension.

An ‘adequate’ amount is classified as putting aside 12 per cent of gross salary, including employer pension contributions, from the age of 30, yet the average being saved is 9 per cent.

Ian Naismith, head of pensions at Scottish Widows, said: ‘It is vital that people who are still working realise the difference between wanting a good retirement and actually planning for one.’ continues here

So there we have it, there is no help for ordinary men and women, struggling to make ends meet and keep a roof over their heads and that of their children, yet usurious banks, such as Northern rock have public money thrown at them. Remember, as they take your home, as they leave you with nothing, that government money is your money, it isn’t theirs, it is money earned by the sweat of the workers, yet for all your toil it is only the bankers that gain. Nationalism of course, sees it rather different, we believe that, the banks should be subservient to the state, that the banks should serve the people rather than enslave the people, perhaps its time to reign in the power of the moneymen. 14

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