Ireland faces two-year recession, ex-central banker says
Friday June 13 2008
The U.S., U.K., Spain and Ireland face recessions of up to two years because inflation will prevent interest-rate cuts, said Sir Howard Davies, a former deputy governor of the Bank of England.
Davies, an adviser to China's banking and securities regulators, spoke in an interview today in Beijing.
Central banks are battling to douse inflation and sustain growth in the face of soaring oil and food prices and a global credit crunch. Federal Reserve Chairman Ben S. Bernanke this week pledged to ``strongly resist'' any surge in inflation expectations.
``The cavalry came over the hill in the form of lower interest rates but there's no more cavalry,'' said Davies, who is chairman of the London School of Economics and the former head of the U.K.'s Financial Services Authority. ``Central banks will focus now more on inflation and that means further interest-rate cuts to bolster the markets will not occur.''
Inflation has become a bigger threat to the global economy than fallout from the subprime loan crisis in the U.S., Davies said, adding the U.S. will stop cutting rates and the European Central Bank will probably raise them.
The economic climate ``is the most difficult situation for central banks that I can recall,'' he said.
Falling home prices will undermine consumer spending, pushing the U.S., U.K., Spain and Ireland into recessions that won't be deep and will last 18 months to two years, Davies said.
Borrowing Costs
The Fed has lowered its key rate to 2 percent from 5.25 percent since September. The ECB has kept its main refinancing rate at a six-year high of 4 percent since June last year.
``Ripples from this storm are continuing in a quite frightening way,'' Davies said, talking of the effects of the subprime crisis.
The plunge in the stock of Lehman Brothers Holdings Inc., down 65 percent this year, is ``a panic,'' the former central banker said. The investment bank ``seems to have strong liquidity, has access to the discount window at the Federal Reserve, and has been successful over a long period -- yet everybody is running for the exit and people are getting trampled in the rush,'' he said.
Last summer, when the subprime crisis began, the effect on banks' balance sheets was uncertain. Disclosures since mean ``we do now know what is on Lehman's balance sheet.''
Lenders and investment banks are contributing to the liquidity shortage by rebuilding balance sheets, said Davies.
``We have a situation where institutions individually are acting rationally by protecting their own liquidity but the collective outcome is a disaster.''
