The Bank of England provide back-up
Mervyn King, The Bank of England Governor has guaranteed to provide back-up to the financial markets in the form of cash injections as he warned that the credit crunch is now moving into a different phase.
£5 billion has already been provided by The Bank of England to try and help restore confidence in financial markets.
The housing market has weakened lowering prices and demand across business and residential property. Mr King said that house prices should stabilise over the next few years and prices should also become more affordable for first time buyers.
Mr King also commented; “Across the world, confidence in financial markets is fragile. It is not that banks, at least in the UK, have made loans that are likely to result in unsustainable losses,”
“The heart of the problem is not in the real economy. It is in the financial sector itself.”
“Uncertainty about the strength of banks’ financial positions has grown because of their difficulties to secure funding against assets they hold.”
The main issue revolves around the inter bank lending rate, this is the interest rate at which banks lend money to each other. This rate is still very high because banks are still concerned about the available funding to repay money lent to each other.
Last Thursday Chief Executives from Barclays, HSBC, Lloyds TSB, HBOS and the Royal Bank of Scotland met with Mr King to discuss the situation.
This was of course following the huge fall in HBOS share prices after what seems to have been rumors regarding the banks lack of funding spreading across markets the day before. To date these rumors have been unproven and the bank is not in financial difficulty.
Mr King said that inflation will rise to around 3 per cent but over the next few years will return to the target inflation rate of 2 per cent.
He concluded that “Problems in the UK economy - especially in the housing and labour markets - were not as bad as across the Atlantic.”