UK Rate-Setters Hint at More Cuts, Hurting Pound

Bank of England interest rate-setters indicate more cuts are likely, causing pound to weaken

Two rate-setting members of the Bank of England indicated on Monday they favor deeper rate cuts to help the economy through the looming recession, causing a further fall in the value of the pound.
The Bank of England's deputy head, who also sits on the bank's rate-setting committee, said the bank had been surprised by the severity of the financial crisis.
"We did spot some crazy borrowing going on ... and we said, actually, for a couple of years before the crash that a correction was coming," John Gieve told the BBC.
But he added: "We didn't think it was going to be anything like as severe as it turned out to be."

Currency traders took Gieve's comments as an indication that he supports further interest rate decreases in January to stimulate spending and help pull the country out of the financial crisis.
Tim Besley, another member of the rate-setting committee, indicated that he also favors more cuts to interest rates to combat the risk of deflation, or dropping consumer prices.
"While falling prices might seem like a good thing, they would also lead to falling wages or rising unemployment," Besley wrote in an article for Britain's Daily Mail newspaper. "To make sure that inflation is not below target in the next year or even longer, the cuts in the official rate...need to have an impact."

The pound fell in the wake of the comments because rate cuts tend to weaken demand for a country's currency by reducing the yield on interest-bearing investments.
The pound fell to near parity with the euro -- hitting just euro1.0501 -- while it dropped more than 1 percent against the dollar, to as low as $1.4688.
The Bank of England has cut its interest rate three times since October, bringing it down by a total of 3 percentage points to just 2 percent -- a 57-year low.
Though there could be future cuts, Gieve said interest rates are too blunt an instrument to prevent financial crises from happening again.

"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy ... and individual supervision and regulation of individual banks," he told the BBC.
Had the Bank of England attempted to use interest rates to keep the price of assets -- like houses -- from spiraling upward, it would have held down the level of activity in other parts of the economy, such as manufacturing, Gieve said.
He acknowledged that the government could end up losing money from its nationalization of several of the country's banks.
"There are some books -- Northern Rock, Bradford & Bingley -- which clearly have a level of defaults in them," he said, adding that he was not yet sure whether the defaults would cause the taxpayer to lose money.

The comments came as British Prime Minister Gordon Brown laid blame for the global financial crisis on a reckless banking system.
In an interview published Monday, Brown was quoted as saying that he's angry with bank bosses who failed to acknowledge the risks they were taking.
"I'm angry -- angry we had a banking system where people neither knew the risks they were taking or were open enough about the problems they had," Britain's Daily Mirror newspaper quoted Brown as saying.

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