The Bank of England Lays a 10 Billion Pound Cushion as Darling Prepares To Deliver His Budget

The Bank Of England was compelled to inject 10 billion pounds in the short term money market so that banks could have money for their inter banking transactions. This move, just before the budget is to be presented by the Chancellor, Alistair Darling, seems to be an ominous indication as to the serious problems that have afflicted the UK economy.

The US economy too, which is facing a similar predicament, has decided to pump in an additional 100 billion pounds in the money market as the US Federal Reserve believes that the problems caused by the sub prime crisis have now spread their tentacles in other markets as well. So, even though the Bank of England has slashed its interest rate to 5.25% and held it there, the US Federal Reserve has already slashed its rate to 3%, with another .25% decrease expected in the coming week in a bid to stop the fall of the US property market.

The slump in the US market seems to have negatively affected Britain too, which is in its worst state after the nineties crash. This the 3rd time that the Bank Of England has had to pump in money after doing the same in December 2007 and again in January 2008, since the inter banking rates were again rising upwards.

The housing market too is in its worst state as compared to the previous 9 years with homebuyers taking only 50,300 new loans in January 2008. This is half the number of loans given in August 2008. The National Institute of Economic and Social Research has already cautioned that the economy has slowed down since the start of this year. With food, energy and fuel prices increasing at an alarming rate, Chancellor Darling will face a tough time in presenting a balanced budget since Britons will not be in any state to bear the brunt of any additional tax hikes or subsidy cuts. As it is, Chancellor Darling might be forced to tone down any forecasts on growth in the forthcoming budget.

The move by both the countries to pump in additional money in the markets was taken in positively with the FTSE 100 rising by around 140 points to 5,783.4 and the Dow Jones in New York going up by 3%. The dollar too rose to a little above 2 to the pound. The Bank of England could again pump in additional money, if required in the coming month after reviewing the situation. Vince Cable, the treasury spokesman said that there were reasons to believe that Britain was facing a very high risk of recession. He said that hoped that Chancellor Darling would cut interest rates and present a way out for homeowners to avoid their homes from getting repossessed.

Lending Banks had already tightened their rules since January 2008 by asking potential homeowners applying for new loans to cough up higher deposits due the cash crunch. These banks have also stopped shelling out their 'above 100%' home loans in a bid to reduce their risks to probable bad debts.

Consequently, Britons are waiting with bated breath for the forthcoming Budget and it would have to be seen as to whether Chancellor Darling can go about the budget with a free hand or whether political compulsions will force him to cut some corners. The multiplicity of so many overlapping problems such as food, fuel, energy and property all at one time will make the Chancellor's job very difficult indeed. Either way, the Bank of England's liquidity injection is only a short-term measure and the policies laid down in the coming budget might indicate as to whether Britain can truly stay out of recession.