The Bank of England is poised to cut interest rates or launch another round of quantitative easing if the euro collapses, it has emerged. A senior official for the Bank said the measures would “again play [their] part in mitigating the impact” of Greece or other countries leaving the single currency. The comments come after the head of the IMF suggested last week that British interest rates may have to be cut to zero if the economic situation deteriorates.
The Bank has already completed a quantitative easing program, effectively printing more money, worth £325 billion and this may be extended again. David Cameron hosted a meeting with Sir Mervyn King, Governor of the Bank; Lord Turner, the chairman of the Financial Services Authority; and the Chancellor, to discuss contingency plans to deal with the collapse of the euro. There is growing speculation that Greece may be forced out of the euro following new elections next month, if a coalition government cannot be formed that will back austerity measures.
In Britain, ministers have already overseen extensive contingency planning to prepare for the possible impact of the break-up of the euro. This extends from asking banks to insure their positions in Greece to considering new border controls to prevent a wave of immigration from beleaguered European economies. A disorderly euro-zone break-up could spark another deep recession in this country comparable to that caused by the banking crisis. Yesterday, Dr Ben Broadbent, a member of the Monetary Policy Committee and former Treasury adviser, said that the Bank of England was ready to intervene.
He said: “Were the still unlikely worst-case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact.”
But he added: “While they are both necessary and effective, these domestic interventions have their limits. It remains the case that, for the time being at least, the most important policy decisions affecting the UK are being taken in other parts of the continent.
“Fears have increased of a rare but bad economic outcome. These heightened fears may already have been affecting the growth of UK activity, investment and productivity for some time.” However, the economist also indicated that the financial markets may already be over-reacting to events in Europe.
“Markets and businesses possess ‘animal spirits’ and can overreact to events,” Dr Broadbent said. “They may have done so again.”
Yesterday, the Greek government announced another €18 billion (£14.4 billion) of funding for the country’s beleaguered banks. The Spanish government reiterated assurances that it did not require an international bailout, despite this now being seen as inevitable by many financial experts.
Bank of England is however not alone in preparing for the worse. The chief executive of the multi-billion pound Lloyd’s of London has publicly admitted that the world’s leading insurance market is prepared for a collapse in the single currency and has reduced its exposure “as much as possible” to the crisis-ridden continent.
Richard Ward said the London market had put in place a contingency plan to switch euro underwriting to multi-currency settlement if Greece abandoned the euro. In an interview with The Sunday Telegraph he also revealed that Lloyd’s could have to take writedowns on its £58.9bn investment portfolio if the eurozone collapses.
Europe accounts for 18pc of Lloyd’s £23.5bn of gross written premiums, mostly in France, Germany, Spain and Italy. The market also has a fledgling operation in Poland.
Lloyd’s move comes as a major Franco-German provider of credit insurance for euro-zone trade, Euler Hermes, said it was considering reducing cover for trade with Greece because of the risk the country might leave the euro-zone.
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