Banking News UK Economy Likely To Be More Severely Affected Than Other Countries Says Chancellor 2659

UK economy likely to be “more severely affected” than other countries says Chancellor

16 December 2008 / by Rachael Stiles
Alistair Darling has warned that the UK economy is likely to be “more severely affected” than other countries by the downturn in the economy, because of London’s position as the major financial services centre of the world.

Talking to ministers yesterday, he said that like every other developed country, Britain is facing a “huge challenge because of the economic downturn, the likes of which we have not seen in generations.”

Olympics minister Tessa Jowell went one step further, telling the BBC that the UK is “facing a recession deeper than any that we have known.”

Tories pounced on her words, translating them as an admission of failure from the Labour party, but in a retort to the Financial Times she said that while “This may well be the worst recession the fact is we’re better equipped to deal with it than any other country.”

Hopes rose for cheaper borrowing as Mr Darling also announced that he is cutting the fees which the Government charges banks in return for a £250billion guarantee on their lending.

The plan is part of the Government’s initiative to ease the currently tight credit conditions, but lenders have been told that any further injections of cash might have to come with more conditions attached, such as an agreement for them to increase their levels of mortgage lending and other loans.

“Banks are beginning to extend lending, but there is a great deal more to be done,” the Chancellor told Parliament yesterday, “by the end of this year we expect some £100billion will be extended.”

Banks have welcomed the Chancellor’s reduction in guarantee fees, but some industry analysts remain sceptical that the rate cut will not be sufficient to trickle down and benefit cash-strapped consumers. Analysis from the Financial Times suggests that for three of the biggest banks the cut will amount to a saving of just 0.25 per cent.

But Angela Knight, chief executive of the British Bankers Association, said that “This is extremely important and everything counts. This will make the scheme less expensive for many banks who are using it.”

This cut in the cost of guaranteeing lending can be passed onto the consumer more easily than a cut in the base rate, for instance, because it is a direct cost to them of borrowing the money in order to lend it to their customers.

In order to get the government guarantee, and exchange their debts for Government bonds, the UK’s banks have to pay 50 basis points, plus a rate based on the average cost of insuring their bonds against default.

© Fair Investment Company Ltd

Written by Editorial Team