The Bank of England is poised to cut interest rates or launch another round of quantitative easing if the euro collapses, it emerged on Monday.
A senior official for the Bank said the measures would “again play [their] part in mitigating the impact” of Greece or other countries leaving the single currency.
The comments come after the head of the IMF suggested last week that British interest rates may have to be cut to zero if the economic situation deteriorates.
The Bank has already completed a quantitative easing programme, effectively printing more money worth £325billion and this may be extended again.
Yesterday, David Cameron hosted a meeting with Sir Mervyn King, Governor of the Bank; Lord Turner, the chairman of the Financial Services Authority; and the Chancellor, to discuss contingency plans to deal with the collapse of the euro.
There is growing speculation that Greece may be forced out of the euro following new elections next month, if a coalition government cannot be formed that will back austerity measures.
In Britain, ministers have already overseen extensive contingency planning to prepare for the possible impact of the break–up of the euro. This extends from asking banks to insure their holdings in Greece to considering new border controls to prevent a wave of immigration from beleaguered European economies.
A disorderly eurozone break–up could spark another deep recession comparable to that caused by the banking crisis.
Yesterday, Dr Ben Broadbent, a member of the Bank’s monetary policy committee and former Treasury adviser, said that the Bank was ready to intervene.
He said: “Were the still unlikely worst case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact.”
But he added: “While they are both necessary and effective, these domestic interventions have their limits. It remains the case that, for the time being at least, the most important policy decisions affecting the UK are being taken in other parts of the continent.
“Fears have increased of a rare but bad economic outcome. These heightened fears may already have been affecting the growth of UK activity, investment and productivity for some time.”
The economist also indicated that the financial markets may already be overreacting to events in Europe.
“Markets and businesses possess ‘animal spirits’ and can overreact to events,” Dr Broadbent said. “They may have done so again.”
Yesterday, the Greek government announced another €18 billion (£14.4 billion) of funding for the country’s beleaguered banks. The Spanish government reiterated assurances that it did not require an international bail–out, despite this now being seen as inevitable by many financial experts
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