But the Bank of England should have intervened earlier on, says richard ehrman |
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It was not just the City that breathed a big sigh of relief this morning, when the Bank of England cut interest rates by a quarter per cent. But it was the City that had most at stake, and not only because markets would have plunged if the monetary policy committee had held its hand.
Nowadays we tend to assume that the Bank's job begins and ends with the control of inflation. But the Old Lady of Threadneedle Street is also meant to ensure the stability of the banking system, and in the wake of the run on Northern Rock this has been looking shakier by the week.
Yet while both the European Central Bank and the Fed have tried to address strains in the crucial interbank markets - in which banks borrow and lend to each other - by pumping in additional funds, the Bank of England has chosen to remain largely on the sidelines.
The result, surely unintended, has been |
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| Admiration for Mervyn King has given way to alarm over his insouciance in the face of looming disaster |
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that monetary conditions have tightened significantly, just as the economy has been heading into a slowdown. In effect, as this crisis has unfolded, the Bank has increasingly lost control over interest rates - the main weapon in its armoury.
Equally serious is that as rates in the interbank market have soared as much as one per cent above its own base rate, the entire financial system has looked at times as if it could seize up.
Little wonder, then, that admiration for the determination of the Bank's Governor, Mervyn King, that the City must sort out its own mess has recently given way to alarm over his apparent insouciance in the face of looming disaster.
By making the first of what is likely to be a series of cuts this morning, the Bank will be hoping not just that the economy can avoid recession, but that the banking system - for which it is responsible - avoids a heart attack. 
FIRST POSTED DECEMBER 6, 2007 |
Opinion Digest
Time to face up to the gravity of the crisis
Northern Rock: the madness of crowds
