BoE Governor answers to MPs

by Gill Montia

Story link: BoE Governor answers to MPs

The Governor of the Bank of England, Mervyn King, will today defend the bank’s handling of the Northern Rock crisis and its policy on market intervention, before the Treasury Select Committee.

Yesterday the bank pledged to inject an initial £10 billion into the money markets to ease the credit shortage, after previously declaring that such action was beyond its remit.

The move, which follows the decision of the Federal Reserve, the US central bank, to cut interest rates by one-half of one percent, has raised hopes that the Bank of England will follow suit by reducing the base rate.

In recent weeks Mr King has warned that offering help to overstretched lenders could encourage them to take further risks.

However, critics of the Governor maintain that this stance pushed Northern Rock to the brink of collapse, with the offer of emergency funding coming at the eleventh hour.

At the same time, the Government had to act and guarantee savers’ money, to stop a run on Northern Rock.

City analysts are accusing the Bank of England of making a U-turn in policy and it is rumoured that it had to be forced into action over Northern Rock by the Chancellor of the Exchequer.

Shares on the London stock market recovered significantly after the bank pledged an initial auction of £10 billion, followed by two further injections of cash at weekly intervals.

This combined with the actions of the Federal Reserve has gone some way to stabilise the crisis in the banking system but questions are being asked as to whether, giving the scale of the crisis, Mr King’s earlier tough stance wasn’t dangerously out of touch.