Citigroup slams Bank of England for risking damage to real economy

By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, March 26, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/26/cnciti...

Citigroup has called for radical measures to end Britain's financial crisis, rebuking the Bank of England for moving too slowly to meet liquidity needs and waiting too long to head off an economic downturn.

"The downside risks to UK growth are sufficiently severe that the Bank of England should now be adopting a more determined approach to easing financial market strains. Relative inaction has a cost," said the bank's chief UK economist, Michael Saunders.

The blunt criticisms come as Britain's interbank borrowing market began to sieze up again.

Three-month LIBOR rates rose yesterday for the 11th session in a row to 5.995 percent.

"The UK money markets have become dysfunctional. Three-month money rates are up 50 basis points since mid-January. The Bank of England seemed to think that the problem would fade away of its own accord. Instead, it is getting worse," Mr Saunders said.

"They still seem to be concerned about moral hazard, but we are long past that. It is not a question of bailing out the City. We're faced with the threat of unnecessary damage to the real economy," he said.

The Bank of England is in part hamstrung by its rigid anti-inflation mandate. Rising energy and food costs are likely to push inflation back over 3 percent in coming months, making it very hard for the Monetary Policy Committee to justify pre-emptive measures to cushion the downturn. The US Federal Reserve has a broader licence to follow its instinct.

Citigroup said the bank should adopt a slate of targeted measures proposed by Willem Buiter, a former Monetary Policy Committee member. These include accepting a much broader range of collateral in exchange for loans, outright purchases of different kinds of private securities, and longer maturities for borrowing. These steps could alleviate financial strains without fuelling inflation.

Tim Bond from Barclays Capital echoed the concerns, fearing that the BoE has been left behind as the Fed and the European Central Bank opt for more expansive and creative measures to ease the crisis.

"Britain risks being the odd man out. The reason why we had a bear raid on HBOS last week is because people question whether the Bank of England is there to backstop the system. We need a clear framework to restore confidence, " he said.

"They need to do two things: increase the volume of liquidity available, and widen collateral. The good news is that the authorities are looking at a lot of ideas and are sensitive to the problem," he said.

The Bank of England met with the heads of major UK lenders on Thursday to try to soothe concerns and to explore bolder measures after the Fed's decision last week to invoke a Depression-era clause to take on $30 billion of Bear Stearns liabilities and lend directly to broker-dealers. Citigroup said there had been a rise of 100 basis points in spreads for fixed-rate mortgages in Britain since the credit crunch began, negating the effects of two quarter point rate cuts.

"Forward rates in money markets imply an extended period of extreme stress," said Mr Saunders. Liquidity has dried up in the Gilt market, while net redemption of bonds and shares by UK companies reached L2.6 billion in February.

Citigroup has cut its UK growth forecast to 1.25 percent for 2008, even lower than the CBI's latest downgrade to 1.7-1.9 percent.

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