United Kingdom : Getting out of recession...

EcoTV: The expertise of the economic research department of BNP Paribas.

Sibylle Dehesdin: The banking crisis has severely affected the UK economy. Despite the launch of several stimulus packages, the country has entered a deep recession and there are no signs of a turnaround.

We are with Raymond Van der Putten to discuss the most recent developments.
In early March, the Bank of England not only cut again its policy rate by 50 bp to only 0.5%. But also adopted quantitative easing program. Why?

Raymond Van der Putten: Lower interest rates can help the economy is several ways. Most obviously, lower rate will lower market costs to the extent that they are passed on by the banks. They also might stimulate households to increase borrowing. Although household indebtedness may be desirable in the long run, a drastic reduction at the moment can throw the economy in an even deeper recession. However, an essential condition is that banks are also willing to lend. This has been the weakest link. Over the past year, money and credit growth have considerably slowed. This has contributed to the worsening outlook, and provoked even more caution on the side of banks in their lending policies.

Sibylle Dehesdin : One of the major problems seems indeed the functioning of the financial markets. Banks have tightened credit conditions and are worried to lend to enterprises and households, and even to each other. Some markets have completely seized up. What measures has been taken to improve the situation ?

Raymond Van der Putten: The government has launched two bail-out packages for the financial sector, one in October and again in January. As a result of the recapitalization in October, the government has taken large shares in some of Britains main high street banks. But it turned out that this was not to be sufficient to restart lending. A major problem for the banks is dealing with the so-called toxic loans. In the second bailout package in January, the government announced an insurance scheme for losses on these loans, which is now being implemented. This should help to clean up the balance sheet of the banks, which will help to restart lending to business and households. In addition, in order to boost the supply of money and credit, the Bank of England will purchase GBP 75 billion of gilts and private assets over the next three months.

Sibylle Dehesdin: Interest rates are almost at zero, and the Bank of England adopted a quantitative easing measure. The government coffers are almost empty. Nevertheless, the government actions do not seem to have been quite effective. What else should be done?

Raymond Van der Putten: It is true that the effect of the measures on the economy has been limited for the moment. However, we should not forget that it takes time before the measures have been implemented and before they have worked their way fully through the economy. But even more important, the effectiveness of the measures has been hampered by the lack of coordination between governments. In April, the G20 will meet again in London, and hopefully they will be able to agree on a more coordinated approach. In the most favourable case, the UK economy could turn around in the second half of the year thanks to all the policy measures combined with lower commodity prices and currency depreciation.

Category:

News & Politics

Tags:

• banking crisis
• UK economy
• Bank of England
• G20
• depreciation
• currency
• commodity prices