LONDON (MNI) – The exceptionally large wedge between the Bank of
England’s key rate, Bank Rate, and the cost of commercial banks’ funding
is a major reason why Bank Rate is so low, BOE Governor Mervyn King said
at a press conference following the publication of the BOE’s May
Inflation Report.
The BOE’s Monetary Policy Committee has held Bank Rate at 0.5% but
this is far below the level at which commercial banks can obtain
funding. Some analysts have said with the wedge so wide, a hike in Bank
Rate may make little difference to commercial banks, as the wedge could
narrow, but King appeared to take the opposite view.
“What you can see is an enormous gap, relative to historical
experience, between the rate at which banks are paying for their funding
and Bank Rate and obviously that explains in large part why Bank Rate is
so low. If we were to raise Bank Rate it would increase further the cost
of funding for banks,” King said.
“That wedge needs to narrow for us to be confident that the banking
industry can fund a recovery the same way as it did in the past,” King
said.
King also highlighted the weakness of banks’ corporate lending.
“A credit crunch is about the willingness and the ability of the
lending system to lend to the rest of the economy. It is clear that
lending to the business sector is still falling, and that shows very
clearly in our data,” King said.
“If you see a gradual improvement in credit conditions I would
expect and hope real money supply would pick up,” King added.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
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