The Bank of England (BoE) warned that the correction in the credit markets had gone too far and banks and financial markets were too pessimistic and at risk of making the financial crisis a self-fulfilling prophecy. The Bank’s twice-yearly financial stability report says that the credit markets had ‘overstated the losses that will ultimately be felt by the financial system and the economy as a whole’. The report added that there was a ‘significant increase’ in risk that a major bank collapse or reluctance to lend would disrupt the financial system, and the process of adjustment is proving even ‘more prolonged and difficult’. The bank believes however, that financial institutions will soon regain their risk appetite in the coming months.
Perhaps the BoE’s renewed positivity for the economy has something to do with the reduction in tax revenue the government is experiencing as the credit crunch continues. It’s estimated that the chancellor will plunge at least £16 billion deeper into the red over the next two years as tax receipts, particularly in income tax, stamp duty and VAT, dwindle. It will limit what the chancellor has available to offer in pre-election ‘giveaways’ or extra spending power should the economy tip into recession.
Bankers hit back at comments (reported yesterday) by the governor of the Bank of England Mervyn King regarding their multi-million pound bonuses. The British Bankers’ Association went on the offensive yesterday saying Mr King should avoid wading into the row over bonuses, when, as a financial services industry, many jobs are currently hanging on the line. Most bankers dismissed the comments as a ‘giant red herring’, saying the governor was just trying to deflect attention away from the central bank during a difficult time.
Meanwhile, in America, the Federal Reserve cut interest rates by a quarter percentage point, to 2 per cent yesterday. It is the seventh consecutive reduction in rates. It signalled that there would be a ‘pause’ in injecting more liquidity into the economy, saying it would ‘act as needed’ to promote growth and curb inflation.