–BOE Dale In Quarterly Bulletin: UK Recovering From Financial Crisis

LONDON (MNI) – The UK economy is continuing to recover from the
financial crisis but it is a “slow and painful” process, Bank of England
Chief Economist Spencer Dale says in the foreword to the BOE latest
Quarterly Bulletin.

The QB contains a number of articles focused on learning the
lessons of the financial crisis and they highlight some of the
difficulties facing policy makers.

One article finds evidence that banks have widened their margins on
new lending, with their lending rates being cut by much less than the
BOE’s Bank Rate.

The QB also contains a report on a workshop of central bank chief
economists, which highlighted the irreducible uncertainty in central
bank modeling.

“The UK economy continues to recover from the effects of the
financial crisis. But that adjustment process has been slow and
painful,” Dale says in the foreword.

The QB articles look at the impact of the financial crisis on the
pricing of new household borrowing; how it impacted on world trade
and how to interpret survey data showing falls in business output
expectations.

It also looks at recent developments in financial markets.

“Sentiment in financial markets improved in June and July, before
deteriorating somewhat in August,” Dale says.

While UK fiscal consolidation plans “removed a key source of
uncertainty affecting sterling asset prices” – doubts have “remained
about the durability and speed of the global economic recovery going
forward”, Dale said.

With bond yields in major economies falling further “UK monetary
policy remained highly accommodative. And market participants continued
to push back the timing of when they expected this accommodation to
start to be removed,” Dale notes.

Summarising the various articles by BOE economists in the QB, Dale
says one piece of research explores why banks failed to fully pass on to
customers the aggressive cuts in the central bank key interest rate,
Bank Rate.

Bank Rate was cut to 0.5% in March last year from 5.0% in September
2008, but many UK borrowers have not seen anything like the full
benefit of this historically low level of Bank Rate.

The QB article says the fall in interest rates for new household
lending to households was markedly smaller and some interest rates
actually rose.

“Higher spreads on long-term wholesale funding costs faced by
lenders have been a key contributor, in part as market participants
revised up their perceptions of the riskiness of lending to banks,” Dale
says.

However, the evidence suggests another key factor is banks widening
margins, “with lenders increasing mark-ups over marginal costs for new
lending, which may reflect a need to build higher capital levels within
the banking sector.”

Dale also reflects on a QB article on business survey data on
output expectations. The BOE’s chief economist warns that these output
expectations are not always a reliable indicator of future developments.

Sharp falls in output expectations have “on occasion given false
signals” and “small moves in survey balances appear to contain
relatively little news for aggregate output.”

The BOE research serves as a warning against reading too much into
the balances in business surveys, but Dale says “the weight that should
be placed on surveys when forming a view of the economic outlook is
ultimately a matter of judgement.”

–London bureau: 44 20 7862 7491; email: drobinson@marketnews.com

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