December 2007

2008 will be uncomfortable, warns King
Turmoil in the world financial markets is taking a turn for the worse, leading to a surge in borrowing costs and a potential property downturn, Mervyn King warned yesterday.

The Bank of England governor said the fragility of the banking system could lead to the supply of credit drying up, with knock-on effects on family finances and economic growth.
The outlook for the economy was getting increasingly 'uncomfortable', he added, because growth will slow as inflation rises.

Testifying to the Treasury Select Committee, he denied he has effectively lost control over interest rates. High street lenders are preparing painful increases in the costs of mortgages and loans. The Bank's next rates decision is due next Thursday, with economists divided over the possibility of a cut.

Mr King's testimony suggested borrowers are likely to suffer from a surge in the cost of mortgages and unsecured loans, even if the base rate is left unchanged.

Mr King said he will inject £10bn into the financial markets next week, to help ease the high cost of lending between banks. But he signalled there is a limit to how aggressively the Bank can ease the pain, given that the recent rise in crude oil prices to nearly $100 a barrel could trigger higher inflation.

'Recent economic news has been dominated by the continuing turmoil in global financial markets which has led to a tightening of credit conditions, particularly for the most risky borrowers,' said Mr King. The world credit crisis began in August with rocketing defaults on American mortgages.

Mr King said big international banks could face up to £100bn of losses on their investments in so-called 'subprime' mortgages - loans advanced to poor Americans who had little hope of meeting the repayments.