Credit crunch impact downplayed
Updated on 01 May 2008
The fallout from the credit crunch may not be as bad as feared, according to the Bank of England.
In its twice-yearly Financial Stability Report, the Bank also said sub-prime write-offs could end up costing less than half market forecasts.
The credit crunch has pushed the global economy to the edge of a sharp slowdown after banks lost confidence in each other due to defaults on low-end mortgages in the United States.
Current market estimates of sub-prime mortgages amount to nearly $400 billion and the International Monetary Fund (IMF) has said the wider cost to the financial sector could rise to $1 trillion.
"All of them are potentially significant overestimates of the losses within the wider economy associated with the financial market crisis," the BoE said, estimating actual losses could be closer to $170 billion.
The BoE has been criticised for taking an unsympathetic line on the lending squeeze. The US Federal Reserve has drastically cut interest rates and, along with the European Central Bank, made cash much easier for banks to get hold of.
However, the BoE last week responded by announcing an unprecedented £50 billion swap scheme under which banks can trade in their hard to shift assets for risk-free government debt, which is now going to plan.
While the central bank is clearly concerned about the consequences of the credit crunch, Deputy Governor John Gieve struck an optimistic tone in a statement released with the report.
"The unavoidable correction after the credit boom is proving protracted and difficult," Mr Gieve said. "While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months."
There is strong evidence to suggest the British economy is already suffering at the hands of the credit crunch, with house prices falling, home loan approvals at record lows and consumer confidence at 15 year lows.
Governor Mervyn King commented on Tuesday that a period of slower growth would not be a "disaster", saying it wasn't all doom and gloom just yet.
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