By John Fraher and Brian Swint
Sept. 11 (Bloomberg) -- Mervyn King said the Bank of England's planned money-market reforms won't provide long-term assistance to banks to unfreeze lending and any decision on the matter should be left to Prime Minister Gordon Brown.
The central bank ``will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending'' over the long term, Governor King told lawmakers in London today. ``Only private savers or taxpayers via the government can provide such funds.''
King's central bank will next week unveil proposals to revamp its money-market operations to better cope with financial-market turmoil. With Brown under pressure to ease the U.K.'s housing slump, King is distancing the central bank from any plan to prop up the mortgage market with public funds.
Chancellor of the Exchequer Alistair Darling is scheduled to make a decision on how to help the market for home loans in coming weeks and King said today the minister still has an ``open mind'' on the matter. A Treasury-commissioned report said in July that Brown could consider guaranteeing mortgage-backed securities.
King today edged away from comments made last month opposing such a guarantee, saying he was just outlining what such a move would mean for taxpayers' funds. Still, he was forced to deny that he is giving too much advice to the finance minister.
``I am not giving the chancellor a public lecture,'' said King in testimony to Parliament's Treasury Select Committee. ``It is perfectly reasonable to explain what central banks can and can't do and that is what I am doing.''
`Stressed' Conditions
The Bank of England will publish proposals to change its money-market rules at the end of next week. King said in June they will be designed to cope with both ``normal'' and ``stressed'' conditions.
``The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks,'' King said. It will only help banks trying to cope with ``temporary'' problems, he said.
The new system would succeed the Special Liquidity Scheme, which allows banks to swap securities damaged by the credit crisis for government bonds. King said today takeup of the program, announced in April, was ``significant'' and the central bank will provide further details when it expires next month.
Tighter Lending
U.K. banks are restricting lending as they cope with a yearlong credit rout, making it harder for potential homebuyers to find mortgages. That's exacerbating a slide in house prices and eroding support for Brown's government. Home values plunged 12.7 percent in August from a year earlier, HBOS Plc said on Sept. 4, in the biggest drop since at least 1983.
King said the ``financial sector is facing the worst situation since the 1930s.'' Deputy Governor Charles Bean said the crisis has some time to run yet.
The Bank of England's ability to cushion the housing market with interest-rate cuts is limited after inflation accelerated to more than double its 2 percent target. U.K. inflation expectations reached the highest since at least 1999 last month, a Bank of England survey showed today. Consumer prices rose 4.4 percent in July from a year ago and Bean said the weaker pound may add to inflation pressures.
``It would be most surprising if, next week, I were not required to write a further open letter to the chancellor explaining why inflation is more than a percentage point away from target,'' King said today. The Bank of England's mandate requires the governor to write to the chancellor if inflation exceeds its target by more than one percentage point and stays there.
While Bank of England policy maker David Blanchflower said that growth prospects have probably deteriorated in the past month, King said the economy may rebound in a year.
To contact the reporters on this story: John Fraher in London at jfraher1@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.
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