Bank deputy hints at interest rate cut to combat 'credit crunch'

Interest rates could be cut next month to counter the turmoil affecting markets, a Bank of England official said yesterday.

Deputy Governor Rachel Lomax said she feared the financial crisis could trigger a fall in property prices.

Despite voting for rates to remain at 5.75 per cent earlier this month, she said she would be willing to cut rates to combat the "credit crunch" caused by the collapse of the American mortgage market.

Banks have been "hoarding" money rather than lending because they face major losses on portfolios of defaulting U.S. mortgages, she said.

In a speech to the Hull & Humber Chamber of Commerce, Mrs Lomax said: "We need to be very alert to the risk that the economy may be slowing too abruptly.

"At current interest rate levels, monetary policy may be on the restrictive side. And the duration and impact of financial turbulence is very hard to call.

"There must be a risk that at some stage it will spill over into asset and property markets more generally, and trigger a damaging loss of confidence.

"We can, and should, respond quickly and flexibly to early signs of the changing economic weather.

"According to most recent official economic statistics, the weather is still set fair. But we know fouler weather is brewing off shore.

"What is still far from clear is whether we are in for a Force 6 strong breeze, or a full Force 8 gale.'

• Richard Lambert, head of the Confederation of British Industry, warned that the Bank of England should not be too hasty in cutting rates, given the inflationary threat.