King hints at bank lending support

Dec 16 2008

Bank of England Governor Mervyn King has given another hint that extra help could be needed to get banks lending again.

The comments came in his letter to Chancellor Alistair Darling to explain why inflation was still more than double the Bank's 2% target at 4.1% in November.

Mr King wrote: "Additional measures, building on the Government's package to support the banking system announced in October, will probably be required to underpin lending to households and companies."

The Governor's words will spark further speculation over a potential package of so-called "quantitative easing" - pumping more money into the economy in a bid to spur on lending.

The Chancellor, who on Monday agreed to lower the cost of the Government's credit guarantee scheme for banks, said in reply that he would keep this and other measures to support lending "under review".

As the UK economy lurches into recession, Mr King said it was "quite possible" that his next letter to the Chancellor would be to explain why inflation had fallen more than 1% below the Bank's 2% target.

Consumer Prices Index (CPI) inflation - the official measure of inflation - dropped to 4.1% last month from 4.5% in October, official figures showed. The fall has brought inflation down to its lowest level since June and comes after a sharp drop the previous month, when inflation fell at its fastest rate for 16 years.

Tumbling fuel inflation - which saw its largest decline since records began in 1997 - helped bring CPI down for the second month in a row, according to the Office for National Statistics (ONS).

Global recession fears have brought the cost of crude plunging down from its peak of nearly 150 US dollars a barrel earlier this year to just over 45 dollars. The easing in oil prices saw the average price of petrol in the UK fall by 9.3p a litre between October and November, to 95.2p a litre, said the ONS.

Meanwhile, hefty drops in house prices and the Bank of England's dramatic 1.5% cut in interest rates last month helped bring Retail Prices Index (RPI) inflation down to its lowest level since April 2006.