Tucker Says Bank of England Should Only Cut Rates `Gradually
Bank of England policy maker Paul Tucker said the central bank should only cut interest rates “gradually'' as it tries to counter both a jump in credit costs and the threat of faster inflation.
“The broad policy strategy is to offset some but not all of the adverse shock to demand from tighter credit conditions,'' Tucker, who is also head of markets at the central bank, said yesterday in a speech in London. “And to do so by changing bank rate gradually and with transparency.''
The Bank of England is under pressure from executives and former policy makers to cut rates as soon as next week to cushion the economy from a credit-market rout that's threatening to halt the U.K.'s 16-year economic boom. Tucker said the bank will tolerate slowing growth if it means getting a grip on inflation, which it predicts may accelerate to a record.
“This approach probably means allowing a degree of slack to develop in the economy, in the interests of avoiding taking risks with inflation on the upside,'' Tucker said. “My own vote at the April meeting will depend on all the data, some of it still to reach us.''
The central bank, which has cut its key interest rate twice since December to 5.25 percent, is scheduled to announce its next rate decision on April 10.
Bank of England policy makers have refused to follow the U.S. Federal Reserve's faster pace of rate cuts. The Fed has lowered its key rate 3 percentage points since September, including a 75 basis-point reduction last month to 2.25 percent.
`Behind the Curve'
DeAnne Julius, a former Bank of England policy maker, said in an interview on March 27 the U.K. central bank was “behind the curve'' in refusing to lower rates more quickly. Philip Green, the billionaire owner of British clothing retailer Arcadia Group Ltd. told CNBC the next day that rates should drop by at least one percentage point.
Banks have remained reluctant to lend to each other after posting $230 billion in writedowns and credit losses from the collapse of the U.S. subprime mortgage market. The logjam has resisted central banks' efforts to pump extra cash into the system, with rates for three-month loans in pounds yesterday close to the highest since December.
“Whatever path monetary policy takes in the U.K quick payday loan. in the months ahead, it is clear that the process of de-leveraging in the financial system is not complete,'' Tucker said. “There remains a risk that credit creation — the lubricant that the financial system provides to the real economy — will be further impaired.''
Fewer Mortgages
The logjam is already damaging the U.K. property market. House prices fell in March for a sixth consecutive month, Hometrack Ltd. said March 31. Mortgage approvals fell in February close to the lowest level in at least nine years, central bank data showed yesterday.
“Many borrowers seem to have been willing to pay extra,'' Tucker said. “In consequence, banks generally may not have achieved their desired conservation of balance-sheet capacity, and we are now seeing the withdrawal of some lending products.''
Nationwide Building Society, the U.K.'s third-biggest mortgage lender, said March 27 it will stop offering four of its two-year loans and it raised rates on its other products by as much as 0.57 percentage point.
Growth Risk
Tucker said that there is a risk that economic growth will slow “considerably'' because of the credit squeeze. He said that usually, the central bank would be cutting interest rates to offset the impact, an approach which it cannot take now because of the risk from inflation.
“The immediate cost pressures are worse'' than when the central bank published quarterly growth and inflation forecasts in February, Tucker said. “In the near term, CPI inflation is very likely to rise to materially above our 2 percent target.''
Tucker said that “a big question'' the central bank faces is the extent that competition among retailers will blunt the effects of higher prices as they offer discounts.
There are still “downside'' risks to inflation because credit conditions are “unambiguously tighter'' than two months ago, Tucker said. He said that financial markets may now be overpricing risk on some products, and that banks have so far shown reluctance to recapitalize their balance sheets.
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