Banking News Mervyn King Reinforces The Credit Crisis 1301
Mervyn King reinforces the credit crisis
27 March 2008 / by Rebecca Sargent
In the wake of the recent shake ups involving Northern Rock and US bank Bear Stearns, and the speed at which rumours temporarily damaged HBOS, Mr. King spoke of the nervous financial market, and the damage such events have caused.
In addition to this instability, Mr. King warned that inflation could rise to 3 per cent, 1 per cent higher than the target rate. A steep rise in commodity prices such as food, gas and electricity are, according to Mr. King, the key contributers to a rise in inflation.
Mr. King also confirmed recent reports that the economy is slowing down, stating: “Our central projection in February was for economic activity to slow quite sharply this year, as the world economy turns down and credit becomes less widely available.”
If the economy slows, there is a chance that this will, in turn pull the rate of inflation down with it. Meanwhile, both activity and prices on the housing market continue to weaken and the outlook is bleak for the majority of households.
According to Monefacts.co.uk, credit is becoming harder and harder to secure, personal loan rates have risen by an average of 1.7 per cent in the past year and lenders have significantly tightened their lending criteria.
Samantha Owens, head of personal finance at Moneyfacts.co.uk, said: “Unsurprisingly the personal loan market has not escaped the effects of the credit crunch. In 2008 alone we have seen 27 changes to personal loan products.
“Over the last year we have seen lenders reassessing how they offer personal loans too, with more and more lenders adopting personal pricing or a credit rating assessment.
“This amendment is yet another sign that we are all too dependant on borrowing and are willing to accept a higher rate to ensure we get the funds.” Ms Owens concluded.
Stricter lending regulations have come as Mervyn King yesterday suggested that a lack of such rules is partly to blame for the credit crisis. Mr. King said: “The heart of the problem is not in the real economy; it is in the financial sector itself. It stems from an ‘overhang’ on banks’ balance sheets of assets in which markets have now closed. These assets cannot now be sold or used to secure funding in the market – they are difficult to finance. That has created uncertainty about the strength of banks’ financial positions.
Mr. King concluded: “One of the lessons of this financial crisis is that providers of mortgage finance had underestimated the risks, and hence the true cost of the securitisation process.”
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