02/12/11 - Mervyn King mortgage rates are likely to soar

Our whole system's in crisis: Mervyn King warns mortgage rates are likely to soar and tells banks to slash bonuses

Sir Mervyn King warns eurozone crisis 'beyond the control' of any UK authority

• Bank of England preparing for the worst case scenario
• Downing Street says Britain is in the grip of a second credit crunch
• But Governor says Britain's banks are among the strongest in the world

Mortgage rates are set to soar as the Governor of the Bank of England warned the 'extraordinarily serious and threatening' crisis in the eurozone is damaging Britain.

The Bank's financial policy committee said banks were facing higher borrowing rates and may try to pass this on within months – resulting in a 'significant increase' in lending rates.

The sobering report came as governor Sir Mervyn King issued a dire warning about the threat posed to Britain by the euro crisis – because our banks have more than £500billion tied up in European institutions.

Sir Mervyn said the situation was spiralling out of control and deteriorating conditions in the markets were 'characteristic of a systemic crisis'.
'Faced with a crisis of the euro area system, we are seeing at first hand the costs of financial instability,' he said.

As a result, the Bank's governor:

• Ordered UK banks to slash bonuses to staff and dividend payments to shareholders to help prevent financial disaster as Britain braced for a second credit crunch
• Said lenders needed to put their houses in order to shield themselves from the 'extraordinarily serious and threatening' financial storms.
• Insisted banks must continue to lend to households and businesses despite pressure to keep more funds in reserve.

The Financial Stability Report raised the spectre of a rerun of the last credit crunch that crippled the banking system and plunged the global economy into recession.

The Bank gave no estimate of the likely rise in mortgage rates – effectively to pass on increases in the inter-bank lending rates. But even a one per cent increase would add almost £1,000 a year to the cost of a typical £140,000 mortgage.

Source: The Mail

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