Alistair Darling, the U.K. chancellor of the exchequer, said that the G7 leading economies need to take action to ease the ongoing strains on the global financial markets and to strengthen the financial system's resilience.
In a letter sent Monday to U.S. Treasury Secretary Henry Paulson and other G7 finance ministers, Darling acknowledged that economic growth in most major economies will likely be lower than had been expected the last time the finance ministers met.
In last month's budget, the chancellor estimated that the British economy would grow 1.75% to 2.25% this year, after 3% last year, and bounce to 2.25% to 2.75% in 2009, although market analysts believe that the credit crisis might slow growth beyond Darling's forecast.
Signs of this prolonged economic gloom are probably going to prompt the Bank of England to lower rates by a quarter point by the end of the week. The Bank of England cut rates in December and February by a total of 50 basis points to 5.25%. However, the recent sharp rise in Libor rates at which banks lend to one another has pushed up mortgage rates. This was coupled with banks retreating from risky loans and trying to rebuild their profit margins.
In his letter, Darling strongly supported the work being done by the Financial Stability Forum (FSF), and urged "rapid implementation" of these proposals that he believes will, in the short term, serve to calm the turbulence in the market today.
"I particularly welcome the FSF's proposals on prudential regulation of banks, risk management and disclosure by financial institutions, transparency in securitization markets and credit rating agencies," Darling wrote.
The chancellor has also formed a working group of mortgage industry experts led by Sir James Crosby. The new group aims to provide advice to the government on options for improving the function of the MBS market, including measures to broaden the investor base for these bonds and improve the robustness of the market. The working group's first task will be a broad-based assessment of the mortgage finance market's current state.
"Confidence in the market for mortgage-backed securities, in particular, cannot be restored overnight," the Council of Mortgage Lenders said in response to the new working group. "Meanwhile, the shortage of funding is creating disruption in mortgage and housing markets now. While the working group is developing its proposals, we therefore believe there is a need for more immediate action by the central banks, in particular the Bank of England in the U.K., to address market funding problems."
The newly formed entity will draw on the experience and expertise of lenders, investors and the Tripartite Authorities, which is composed of the Treasury, the Bank of England and the Financial Services Authority. It is expected to present an interim report to the chancellor later this summer and a final report in time for the release of the 2009 pre-budget report.
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