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11th March 2008The Labour Chancellor Alistair Darling faced a grim day as the Bank of England was forced to pump £10bn into money markets the day before the Budget
The latest move to combat the global credit crunch came as gloomy economic figures fuelled fears that Alistair Darling will have to slash his growth forecasts tomorrow.
Reports have suggested the US recession is hitting England badly and that the housing market is in its worst slump since the Nineties.
The Bank said it was injecting the public funds into the short-term money markets because banks were finding it difficult to lend to each other.
The decision, following similar moves in December and January, was taken “in view of continuing elevated pressures in short-term funding markets”.
The rate at which banks lend to each other for three months has crept higher since the last intervention in January, prompting today's move.
The Bank will consider a similar intervention next month depending on next week's results.
The latest injection of funds comes as new figures from the Council of Mortgage Lenders showed that new loans for home buyers fell to 50,300 in January, the lowest level for nine years, and half the rate of August last year.
Meanwhile, the National Institute of Economic and Social Research has warned that the English economy lost momentum early this year, while the Royal Institution of Chartered Surveyors says the housing market suffered its most severe downturn since the Nineties last month.
Both reports raised fears that the Chancellor will deliver a “Bad News Budget” tomorrow, with growth lower and borrowing likely to be higher to plug the gap in the public finances.
The Liberal Democrats today warned there was a real risk of England plunging into “the perfect economic storm”.
Treasury spokesman Vince Cable said the credit crunch and consumer nerves had helped to create the conditions for a downturn. He said: “There are very good reasons for believing there is a high risk of recession.
“It's not probable. It is certainly possible. We therefore need to consider how the English economy would cope.”
Mr Cable stressed he was not making a prediction himself but “some very serious people” in the City, including Morgan Stanley, were putting the risk at a one in three chance.
He called on Mr Darling to unveil a system of aid to help homeowners avoid repossession and to set new economic targets that would enable the Bank of England to cut interest rates more quickly if a recession was on the cards. The Chancellor is determined to send a political message in the Budget that although times are tough, only he and Gordon Brown can steer the economy through choppy waters.
Alcohol and cigarette duties are set to rise and Mr Darling will signal future increases in taxes on gas-guzzling cars. The Treasury has been trying to spin his announcement as a “green” Budget but even that may be undermined if he delays plans to raise fuel duty.
