Pressure on bank chiefs to cut rates

Published on Sunday 12 August 2007 00:48

BANK chiefs will come under pressure this week to cut interest rates to head off further losses in the world's money markets.

Top economists believe that Marvyn King, the governor of the Bank of England, and Ben Bernanke, chairman of the US Federal Reserve Bank, will have to reverse their tough line on interest rates, which has seen them increased to damp down price inflation.

But analysts believe that Bernanke could be forced to make an announcement on reducing interest rates as early as this week if US stocks fall further, piling pressure on the Bank of England to follow suit.

International markets have been rattled by concern over written-off loans made in America's "sub-prime" mortgage market, which supplies loans to borrowers with poor credit ratings.

Economists argue that lower interest rates would lead to falls in mortgage rates and so strengthen the housing market. A less shaky mortgage market would give hedge fund operators and other holders of the risky securities a chance to sell them, which they are having trouble doing in the current panic.

Ed Yardeni, president of Yardeni Research in Great Neck, New York, said: "I think they probably have to cut rates, and probably before their scheduled September meeting."

Yardeni noted that it was Federal rate cuts that calmed the market after the 1998 Russian debt crisis.

On Friday, London's FTSE 100 index had its worst day in four-and-a-half years,

losing more than 3.7% - its biggest percentage fall in more than four years. The 200 point loss prompted fears that it could slip below the 6,000 mark this week for the first time since October.

Stock Market experts have been hoping for a calmer start to the coming week following the steep falls.

Henk Potts, equity strategist at Barclays Wealth, said:

"The Dow Jones recovered significantly during the course of Friday. One would suspect that will provide an element of confidence to European bourses, so while there is still the potential for volatility, I would hope we will be looking at a calmer start to the week.

"Beyond that, there is still the potential for a credit crunch."