British policymakers must try to prevent banks from over-reacting when they scale back lending during the economic downturn, Bank of England monetary policy committee member Tim Besley said in remarks publicised by the BoE on Thursday.
Besley's remarks at a November 14 International Monetary Fund conference echo those from BoE Governor Mervyn King on Tuesday, when he warned of a sharp recession if banks did not lend to good-quality borrowers and focused too much on reining in their balance sheets.
"The major issue is to prevent undershooting - banks are now being extremely cautious," Besley told the IMF conference. Britain was suffering a very significant downturn in house prices as part of a necessary rebalancing of the economy, which would also require households to repay debts and save more, Besley said in a recording on the IMF website.
But the immediate priority was to ensure banks continued to lend, as a shortage of credit meant that cuts in Bank of England interest rates were not having their usual impact on the economy, Besley stressed.
"The effectiveness of monetary policy is impaired," he said. "For a long time people were looking at prices of credit. These don't really tell the story. It's really down to credit rationing." King told British legislators on Tuesday that the failure of banks to pass on interest rate cuts to consumers meant the BoE may have to reduce its rates by more than it would otherwise.
"Even now, for the UK the current financial crisis has little to do with default of the real sector onto the financial sector," Besley told the conference - though he warned that home repossessions would soon become a bigger challenge. "A lot of the policy challenges are going to come from that, as we observe a macroeconomic contraction on the back of what was a crisis confined to the financial sector."
Comments
Comments are closed.