Bank Warns Interest Rate Will Stay Low

Bank Of England governor Mervyn King has warned that the interest rate will not be going up any time soon despite a 1.1% growth in GDP

Appearing before the Treasury Select Committee, he said there was "some considerable distance to travel" before rates could return to normal.

Although economic growth is a positive sign, Mr King said it did not necessarily mean the recovery and improving employment levels would be sustained.

He recommended that the Monetary Policy Committee should keep its "foot firmly on the monetary accelerator" to ensure inflation levels are closely monitored and managed.

Mr King said he looked forward to the point when the Bank of England (BoE) could "ease off the accelerator" and return interest rates to more "normal" levels.

But he warned it would be a while until the word "normal" was used again in relation to the nation's finances.

Low interest rates will be good news for those paying off debts like mortgages, but savers will continue to struggle to find banks and building societies offering good rates.

Mr King was also questioned by the committee about a private conversation he had with Deputy Prime Minister Nick Clegg.

The Liberal Democrat leader claimed the discussion helped change his stance on the Conservative policy of making immediate budget cuts.

Despite allusions that Mr King had revealed additional information to Mr Clegg, the BoE governor denied saying anything beyond public statements made days before.

One of the principal concerns to arise from the committee meeting was the continuing lack of credit available to small and medium businesses (SMEs), despite apparent agreements in place to encourage lending.

Mr King put forward the controversial solution of using the state-owned banks to aid credit.

Although the banks are currently working to return to profit, this could be changed to force them to lend to business owners if necessary, said Mr King.

"If we want to use state ownership there would be a way of doing it, not without cost, it may well affect the way people see these banks in the long run, but I think that is the only other instrument I can imagine."

But, in the long term, Mr King said the "heartbreaking" problem SMEs have getting funding could be overcome by encouraging new entrants into the banking system and increasing competition.

Article from: news.sky.com 29/07/10