The governor of the Bank of England, Mervyn King, has warned that the US sub-prime mortgages crisis poses more risks for the UK’s financial system.
He also revealed that it was Chancellor Alistair Darling who decided not to support a Northern Rock takeover bid.
Mr King told the BBC he had advised the chancellor that governments should not provide financial help to one company so that it could take over another.
The Bank of England has agreed to give emergency financial support to the Northern Rock, one of the UK’s largest mortgage lenders, the BBC has learned.
However this does not mean that the bank is in danger of going bust, Business Editor Robert Peston says.
There was no reason for people with Northern Rock savings accounts to panic, he added.
The bank has struggled to raise money to finance its lending ever since money markets seized up over the summer.
The decision for the Bank of England to become the “lender of last resort” is extremely rare – and comes after consultation with the Treasury and the Financial Services Authority.
The Bank of England has raised interest rates for the fifth time within a year, by another quarter of one percent.
Base rates are now 5.75% – their highest level since 2001. That means homeowners face an extra £16 a month on a typical £100,000 mortgage.
And – say experts – rates could go up yet again – after the Bank said it was determined to bring inflation under control.
Employers have warned that ‘relentless’ increases could harm British businesses – and there’s already been a surge of people seeking help with mortgage arrears.
Like the captain of a supertanker, the Bank of England governor Mervyn King is struggling to keep the economy on course.
Four interest rate rises in less than a year have failed to slow the economy down. Now he hopes a fifth 1/4 point rise to 5.75 per cent will stop it running away with itself.
That’s good news for savers but not borrowers, and in particular many homeowners.
Consumer confidence fell for the first time in six months during June, as people braced themselves for higher interest rates, a survey showed.
The drop wiped out half of the strong rise in confidence recorded in May, with people worrying about the economy and jobs both now and in six months’ time, Nationwide Building Society said.
Consumers’ willingness to spend money was the only index to rise during June, increasing by two points, although it still remains broadly flat for the past six months and significantly lower than it was this time last year.
The research comes as the Bank of England’s Monetary Policy Committee begins its two-day interest rate setting meeting. It is widely expected to announce a further hike in the cost of borrowing on Thursday.
The Bank of England governor warns that the cost of borrowing will increase if rising prices continue.
Governor Mervyn King’s warning is the strongest indication yet that more interest rate hikes are on the way.
Although the official level of inflation fell this morning, Mr King observed that the situation for some homeowners looks bleak, with mortgages now at their least affordable level for 15 years.
The bank chief told the Welsh CBI there was a list of worrying inflationary pressures which remained “elevated” and may lead to action by the Bank’s Monetary Policy Committee.
“If these indicators remain elevated, the MPC may need to take further action,” he said.
With it becoming ever easier for householders to borrow from banks, Mr King also warned householders about variable rate borrowing.
He said: “Obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels.”
The prospect of a rise in interest rates has been upgraded to “imminent” after inflation reached 3.1% in March, more than 1% above the government’s target.
Industry experts say homeowners should brace themselves for a minimum 0.25% rise in the Bank of England base rate next month, which is currently pegged at 5.25%. This would represent the fourth rise of its kind since August last year.
Andrew Montlake, partner at mortgage broker Cobalt Capital, said: “A quarter point rise is almost a dead cert for May, but it could be as high as 0.5%.
Inflation has gone past 3%, forcing the Bank of England’s governer to write a letter of explanation to Gordon Brown.
Controlling inflation has been at the very heart of the government’s claim to economic competence.
But today for the first time in 10 years, the rate of inflation rose above Gordon Brown’s target.
The Bank of England has the job of meeting that target: the Governor’s now written the Chancellor, explaining what’s gone wrong.
In his letter, Mervyn King talks of growing price pressures within the economy, and most economists believe more interest rate hikes are imminent.