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Interest rates must rise

paulajohn
Written By:
paulajohn
Posted:
Updated:
20/06/2013

Mervyn King, the outgoing governor of the Bank of England has warned of a rise in the cost of borrowing.

Speaking at last night’s Lord Mayor’s Banquet, King called for the government to prepare ahead of rising interest rates and take ‘decisive action’ on state-owned lenders.

The central bank has kept the Bank Base Rate at 0.5% since March 2009. King warned that such extraordinary monetary policies could not continue indefinitely:

“Both nominal and real interest rates are at unsustainably low levels. There is an understandable yearning for a return to normality.”

However, he said the government needed to address the global imbalance in investment, trade and capital flows:

“A rapid return to higher interest rates would do great damage to the balance sheets of highly indebted households, companies and, especially, financial institutions.

“The challenge in returning to normality is not so much managing market expectations when that eventually happens, important though that is, but in creating the economic conditions in which it is sensible to return to more normal levels of interest rates.”

The governor, who spoke after the chancellor George Osborne, said meeting the challenge would require a “political choice” between changing currency values or restructuring debt.

“It will inevitably be a bumpy ride,” he added.

He also welcomed the plan to return state-owned banks RBS and Lloyds to the private sector:

“The two biggest lenders to the domestic economy remain largely in state ownership. It is difficult to imagine a banking sector like that making a real contribution to any economic recovery. It must be time for decisive action.”

And he dismissed arguments that lenders were being forced to hold too much capital:

“It is insufficient capital that restricts lending. That is why some of our weaker banks are shrinking their balance sheets.” King, who steps down at the end of this month, also took time to reflect on the ten years he has spent as governor of the central bank.

He described it as a “game of two halves”, and continued: “It turned out to be a rather exciting and dramatic game, full of incident, with a red card or two and a passionate and at times justifiably angry crowd.” And he stressed his confidence in his successor, former Bank of Canada governor Mark Carney, stating: “The Bank of England is in safe hands, and the country will be the better for it.”