Call over financial cycle controls

Dec 22 2008

A new way of preventing the financial cycle from getting out of hand is needed, the deputy governor of the Bank of England has said.

Sir John Gieve described interest rates as a blunt instrument and said they should be complemented with something more financial sector-specific.

He told BBC1's Panorama: "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."

And he added; "We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."

He argued that if the Bank had used interest rates to try and address the asset price credit growth, it would have been holding down the level of activity elsewhere in the economy.

"We would have been... holding down the level of employment at a time when consumer price inflation and earnings were stable and reasonably low, and people would have said this is a wilful reduction in the prosperity of the country," he said.

He expressed some uncertainty about what the future held for Northern Rock and Bradford & Bingley, which the taxpayer is now holding.

"There are some books - Northern Rock, Bradford & Bingley - which clearly have a level of defaults in them. (I'm) not quite sure how that will balance out against the residual of the capital," he said.

He added that the Bank was "learning lessons" from the current economic crisis.

Sir John was appointed deputy governor in January 2006. As well as being a member of the Monetary Policy Committee, he has specific responsibility for financial stability and is a member of the board of the Financial Services Authority.