Fed chief and rates unmoved by crisis

Published on Sunday 2 September 2007 00:06

THE Bank of England and the European Central Bank are expected to keep their nerve and leave interest rates on hold this week, despite evidence that the credit crunch that started in the US is hurting institutions on this side of the Atlantic.

US Federal Reserve chairman Ben Bernanke said on Friday that he will not cut interest rates to bail out reckless lenders despite the recent market turmoil.

Barclays was last week forced to borrow 1.6bn from the Bank of England after facing problems in the money markets.

Speaking at the annual central bankers' gathering at Jackson Hole, Wyoming, Bernanke said: "It is not the responsibility of the Fed to protect lenders and investors from the consequences of their financial decisions."

His remarks, interpreted by some as meaning the Fed has yet to decide which way interest rates will go, ran counter to the widely held belief on Wall Street that the Fed would cut rates this autumn to ease the pressure on banks and borrowers.

Bernanke added that the Fed could step in if the financial crisis spilled over into the "broader economy".

But Ken Murray, chief executive of Blue Planet Investment Management, believes there will not be a cut and warned that the Fed's tough stance would lead to falling stock prices: "Markets have been rising in the belief that the Fed is going to cut interest rates. Consequently, there is likely to be a sharp fall in September when they are not cut and the losses that are building in the sub-prime market re-assert themselves."

Higher interest rates are expected to lead to subdued economic growth in Scotland for the rest of the year, but a Bank of Scotland report says growth will pick up next year. Tim Crawford, the bank's group economist, says: "There is the potential for above-average Scottish economic growth in 2008."