Co-operative Bank reports £709m loss amid uncertainty over bad debts plan

Co-op boss says alternative to meeting regulatory requirements to cover £1.5bn shortfall is to put banking arm into administration

A thwarted attempt to become a major player in the banking industry earlier this year continued to haunt the Co-operative Group on Thursday as its bank reported a £709m loss and raised the prospect of a Northern Rock-style rescue if bondholders failed to back a £1.5bn restructuring bid.

The group, which has operations spanning funeral services to supermarkets, said there would be no quick fixes as directors conceded that shoring up the bank, which has 4.7 million customers, would involve job losses and significant restructuring of the wider group.

Richard Pym, the bank chairman, said that without new capital the banking unit "will not be a going concern".

The Co-op group's new chief executive, Euan Sutherland, said there was no plan B. The only alternative to meeting regulatory requirements to fill a £1.5bn shortfall in the bank's reserves would be a government takeover similar to the bailout of Northern Rock in 2008. Sutherland reported that losses at the bank of £709m sent the wider group into a £559m loss, compared with £18m of profits in the first half of 2012.

He blamed £496m of previously undiscovered bad debts and a £150m write-off on IT systems for the deterioration in the bank's financial situation. "It's inevitable in a restructuring of this size that there will be some jobs at risk," he said, predicting that the bank would be diminished from its current scale of 10,000 staff and 320 branches.

Sutherland said a new management team would devise a turnaround strategy with the management consultancy Oliver Wyman. Sutherland indicated that executives would receive bonuses next year despite the group's travails, saying that a remuneration plan will be announced in March that will reflect the need to retain experienced senior staff.

The Co-op's plunge into loss follows a difficult year that started with an audacious bid by its bank to buy 632 branches from Lloyds Banking Group and ended with the banking regulator insisting it abandon the deal and find £1.5bn to cover previously undisclosed bad loans.

The debacle stems from the Co-op bank's purchase of the Britannia building society in 2009, which had joined several other banks in making indiscriminate loans to corporate customers, many involved in overvalued commercial property deals.

Sutherland said the Co-op bank's bad loans were mostly accounted for by Britannia, with half of all its poorly performing retail loans and three quarters of its roughly £440m corporate bad debts blamed on over-zealous loan agreements sold by the building society.

The Prudential Regulation Authority (PRA), the City regulator, said on Thursday that the scale of the losses did not alter its demand that the Co-op plug the £1.5bn hole in its balance sheet.

A rescue of the bank has the support of the Co-op's board, which is made up of 20 non-executive directors, 15 of whom are elected from regional boards and five from Independent Co-operative Societies. Sutherland said the board had considered all the options and agreed to commit £1bn of the Co-op group's funds to cover bad debts in return for a debt for equity swap by bondholders.

Bondholders ranging from pensioners to hedge funds will have to take a loss on their investment under plans for a "bail-in" in coming months.

They will be forced to contribute £500m through an "exchange offer", which will result in a stock market listing for the bank. Some 15,000 holders of Co-operative Bank bonds have written to the Bank of England's financial policy committee seeking an intervention in rescue of the bank.

Mark Taber, representing retail bondholders who believe they should be spared a haircut on their investments, said there was a "disgraceful" lack of detail in the Co-op's offer. He said: "The PRA should not allow this and should make a direction to the Co-op Bank [to alter the restructuring] accordingly."

While the Co-op's board has agreed the deal, there is likely to be much debate inside Britain's largest mutual organisation about the cost of the rescue, the prospect of running a business with a large number of shares owned by non-mutual institutions and the potential for another banking crash to wreck the wider Co-operative Group.

Sutherland, who replaced Peter Marks in May, said: "We are sorry but we are a new team and grasping the nettle and getting on with fixing the situation."

If a rescue fails

Should the Co-op fail to secure a rescue of its banking division it will fall to the government to step in.

There are several options for ministers and which one they choose will depend on the state of the Manchester-based bank.

A Northern Rock-style takeover would be the most draconian. The government purchased all the Rock's shares and made it a wholly-owned state enterprise.

A bailout of the bank would involve a large injection of cash to cover bad loans in return for partial ownership. The state owns 83% of Royal Bank of Scotland and 39% of Lloyds. In the case of Lloyds, following a £20.6bn injection of funds.

Another option was pursued in the case of Dunfermline building society, which like the Britannia building society began offering loans on risky property deals at the height of the housing boom.

Dunfermline, which was unable to raise extra funds from its members to cover bad debts, was absorbed into the Bank of England on a Friday and transferred on the following Monday to the Nationwide.

In each case the first £100,000 of individual savings are protected.

New tougher rules agreed in Brussels are due to take effect later this year, though no date has yet been set. The Recovery and Resolution Directive will force investors that lend to banks to sacrifice some of their assets as part of any rescue plan. It will also force banks to offload profitable divisions to cover losses under a so-called "living will".

The Co-op has in effect adopted the strategy put forward in the directive before it has become law, telling bondholders to sacrifice around a third of their holdings to pay a third of the £1.5bn bailout package. The Co-op group will also sell its insurance arm.

Article Source : http://www.guardian.co.uk

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US economy expands at stronger rate in second quarter, figures show

Rate of GDP growth more than double the pace clocked in prior three months and stronger than the 2.2% economists forecast

The US economy expanded at a stronger rate in the second quarter than previously estimated, according to figures released on Thursday.

After a boost to figures for exports and business investments, the Commerce Department revised its measure of the nation's gross domestic product (GDP), the broadest measure of goods and services produced in the economy, to an annual rate of 2.5% in the second quarter, up from an initial estimate of 1.7% reported last month.

The rate of growth was more than double the pace clocked in the prior three months and stronger than the 2.2% that economists polled by Reuters had forecast.

US stock markets reacted positively to the news, which was released as the Labor Department reported another slide in the number of people claiming unemployment benefits for the first time. Initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 331,000 for the week ending 24 August, the Labor Department said.

The report comes as the Federal Reserve appears close to cutting back on its $85bn a month bond-buying stimulus programme, known as quantitative easing. Federal Reserve chairman Ben Bernanke has indicated that the programme could be scaled back as early as later this year but has as yet not specified a date.

Bernanke has tied a cut in QE to the unemployment rate. Next Friday the US releases its monthly tally of employment figures, the non-farm payroll report. The continued fall in initial claims helped push the unemployment rate to 7.4% last month, its lowest level since late 2008.

However, economists warned that problems remained in the US economy and the revision in GDP also highlighted some of those weaknesses. Consumer spending remained unchanged in the quarter and state and local government spending fell in the quarter as compared to being up in the initial estimate.

Gus Faucher, senior economist at PNC Financial Services, said the rise was good news. "But it's still a 1.6% rise year over year, and that's soft. We are still down 2m jobs and we are seeing significant drag from tax increases and spending cuts."

Faucher said growth should pick up in the second half of 2013 and into 2014. "Consumers are adjusting to higher taxes. Business investment will continue to improve as profits are at a record high and borrowing costs are still very low, despite the recent increase in rates," he said.

Dan Greenhaus, chief global strategist with broker BTIG said: "With the revisions, our original estimate calling for 1.5% growth in the first half was a bit under what has actually occurred. That's a positive but of course what matters now is not what has happened but what will happen. In that regard, the consensus still expects roughly 2.5% growth in the second half but that may prove to be too optimistic."

The GDP figures come amid a looming clash in Washington over the "debt ceiling" – the limit set by Congress on the US's ability to borrow. Treasury secretary Jack Lew warned earlier this week that if Congress fails to act soon, the US would hit its debt limit by mid-October.

Failure to reach a new agreement would risk "irreparable harm" to the US economy and leave the government struggling to make the 80m payments a month it sends out, including military salaries and social security cheques, he said.

Faucher said failure to raise the debt ceiling would be "disastrous – worse than a government shutdown." But he said ultimately he expected Congress would act to see off the crisis.

Article Source : http://www.guardian.co.uk

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Amazon can be undercut by small traders in UK after OFT intervention

Retailer agrees to drop clause banning third-party traders from selling products cheaper elsewhere

Amazon has agreed to drop a clause which banned third-party traders from selling products cheaper elsewhere, following the intervention of the Office of Fair Trading.

Currently, third-party traders are forced to charge the same amount on any other platform as they do on Amazon but independent and rival websites can now undercut it, according to the consumer watchdog.

After numerous complaints from traders using the amazon.co.uk Marketplace platform the regulator opened a formal investigation into the price parity policy in October last year. Amazon says on its website that the rule is "critical to preserve fairness for Amazon customers" who expect to find low prices. The clause meant that a trader could not sell a product, including the delivery charge, for a lower price on its own website or another site such as eBay or play.com. Amazon can suspend sellers who break the rules.

The OFT welcomed Amazon's decision and said it would end the investigation prematurely and would not be drawn on whether or not the company had broken the law. The watchdog had become concerned that the policy was affecting prices and was potentially anti-competitive.

There are 2m third-party traders using Amazon throughout the world, although the company does not break this down by region or country. In the runup to last Christmas, almost two in five items bought on the site were sold by small traders.

A similar investigation has taken place in Germany, and the inquiry by its Federal Cartel Office remains ongoing.

Cavendish Elithorn, the OFT senior director of goods and consumer, said: "We welcome Amazon's decision to end its Marketplace price parity policy across the EU.

"As Amazon operates one of the UK's biggest e-commerce sites, the pricing on its website can have a wide impact on online prices offered to consumers elsewhere. We are pleased that sellers are now completely free to set their prices as they wish, as this encourages price competition and ensures consumers can get the best possible deals."

It is understood that the rule will still stand for US users and traders. Amazon's website said: "We believe that price is an important factor in customer buying decisions. Accordingly, we ask sellers who choose to sell their products on amazon.co.uk not to charge customers higher prices on Amazon than they charge customers elsewhere. Customers trust that they'll find consistently low prices and other favourable terms on amazon.co.uk and we think this is an important step to preserve that trust."

Amazon's Marketplace has faced a backlash from traders in the past.This year the Guardian revealed that the company had imposed fee rises on third parties selling consumer electronics, automotive parts and other goods. Some of the busiest traders in the UK saw the cut they paid to Amazon soar from 7% to 14%, and in Germany fees for tyre sellers lifted from 7% to 10%.

The OFT said it would continue to monitor the online retail sector to see if price parity rules were used by other online businesses and revealed it had 14 cases open under the Competition Act.

Article Source : http://www.guardian.co.uk

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High-street sales lifted by sunshine, sport and summer sales, says CBI

Nearly 50% of UK firms enjoying sales volumes up on year ago, with Aldi and Lidl biggest supermarket winners, finds CBI survey

High-street sales soared due to the sunny weather, British sporting successes and the royal baby, and firms took on more workers at the fastest pace in more than a decade, the Confederation of British Industry claims.

The organisation's monthly distributive trade survey found that nearly half of all businesses said that sales volumes were up on a year ago, with just 22% saying they fell, giving a balance of +27%, the strongest in nine months.

More than one in four retailers added that they expected sales to grow at the same rate next month, suggesting a slow recovery on the high street.

Barry Williams, chairman of the CBI distributive trades survey panel, said: "The feel-good factor from the heatwave, summer sales, royal baby fever and sporting victories, has helped boost the high street. A rise in spending is welcome news, but the bottom line is that confidence will not bounce back fully until family finances improve further."

Lidl's revenues rose by 14.9% from June to Augsut this year.

Growth came from all areas, including clothing, food and recreational goods, while employment in the retail sector is expected to increase, according to the CBI.

In its quarterly survey, the reported employment balance improved to its highest level since May 2002, while the business situation index rose to its highest in three years.

The supposed green shoots come as the UK's third biggest supermarket, Sainsbury's, defied the march of the discount retailersAldi and Lidl as the only one of the big four supermarkets not to lose market share in the last 12 weeks.

Tesco, Asda and Morrisons all lost out, although the UK's fourth biggest supermarket, Morrisons, did manage to stem the tide of recent falls in sales, according to Kantar Worldpanel.

John Coll, director at the retail specialists, said: "Sainsbury's has continued to grow ahead of the market over the past 12 weeks, achieving sales growth of 4.9%. It benefitted from its support of the paralympics last year and its growth has continued since then."

Sainsbury's market share grew to 16.5% from 16.4% last year, while Tesco fell to 30.2% from 30.7%, Asda fell to 17.1% from 17.5%, and Morrisons fell to 11.3% from 11.5%.

However all supermarkets did see an increase in takings, partly due to inflation, but also thanks to the prolonged warm summer.

Ice cream sales soared 21%, sun care products rose 37%, and hay fever remedies also grew 37% over the summer, compared with the same period last year.

The biggest winners, though, continued to be the discounters, as Aldi and Lidl both recorded their biggest market share since entering the UK market in 1989 and 1994 respectively.

Aldi increased its market share from 3% to 3.7% since last year, with takings in the 12 weeks to August 18 soaring 31.9% to nearly £1bn, compared with £660m in the same period in 2012.

Lidl also saw a boost to its market share from 2.8% to 3.1%, with its revenues also up 14.9% to £760m in the 12-week period.

These supermarkets still remain a long way behind the UK's leading store, Tesco, which took £7.4bn over the same period, or £88m a day.

Article Source : http://www.guardian.co.uk

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Markets hit by fears that Syria attack could raise fuel prices

FTSE down but Shell and BP shares boosted while petrol retailers warn of grim outlook for consumer

Mounting prospects of a US-led military strike on Syria sent shock waves through the energy and financial markets on Wednesday with oil hitting its highest level for six months and drawing predictions that it could reach $150 (£97) a barrel.

The move in the value of crude, reflecting fears that wider Middle East output could be disrupted, gave a major boost to the share price of Shell, BP and other oil companies but sent the stock of heavy fuel-users such as easyJet and International Airlines Group, the parent of British Airways, into a nosedive.

The Petrol Retailers Association also warned motorists that it was only a matter of time before the price of petrol at the pump would have to rise and the outlook was "grim".

Motorists are warned petrol prices will rise as oil hits its highest level for six months, with investors worried the Syrian conflict could affect neighbouring countries. 

The FTSE 100 index fell further in London as investors worried about the potential for a wider conflict involving Iran and even Russia wading in on the side of the embattled government of Assad.

There was a slight rally in prices as David Cameron indicated he would first seek some kind of United Nations approval for an attack on Syria but not before shares in Dubai – the most important financial market in the Middle East – had slumped 7% and the index in Kuwait had fallen by 6%.

Michael Wittner, head of global oil research at French bank Société Générale, said the North Sea crude oil benchmark, Brent Blend, could rise from Wednesday morning's six-month high of $117 a barrel to as much as $150 if the war spread from Syria to key important oil producers such as Iraq. The US crude price, for West Texas intermediate oil, hit a two-year high, rising above $112 for the first time since May 2011.

"We believe that in the coming days Brent could gain another $5-$10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started," Wittner said in an investment note to clients.

"If the regional spillover results in a significant supply disruption in Iraq or elsewhere, Brent could spike briefly to $150," he added.

Syria is not an important oil producer or transit country but the wider area including Saudi Arabia produces 35% of the world's supplies. If Iraq or Iran were affected by any fallout from a military strike on Syria, the global oil market would rely on extra output from Saudi Arabia, the only member of the Organisation of the Petroleum Exporting Countries with significant spare oil production capacity.

"The Saudis could handle most likely scenarios, but the markets will look at the shrinking spare capacity that remains after any disruption is made up, and that would be bullish [for higher oil prices]," said Wittner.

The oil price spike was a boost to Shell, whose share price rose almost 4% to £22.25, and BP, whose shares rose by more than 1% at 452p.

The wider FTSE 100 index of leading companies fell by nearly 0.5% early on , adding to an already 3% slump since the middle of the month on the back of fears about Syria, allied with concerns that the US would finally halt a long-running government economic stimulus package.

Stock markets in continental Europe were also down, as was the Nikkei index in Japan, which fell by more than 2% to 13,264 points, with companies such as Toyota and Sony down up to 3%. The Dubai Financial Market index closed at 2,549.61 points, with Emaar Properties leading the rout. Shares in the developer that built Dubai's Burj Khalifa, the largest freestanding structure in the world, fell almost 8.5%.

Most mining companies based in London, such as Glencore Xstrata, were hit by the political uncertainty, but the price of gold – seen as a haven – continued to rise as did the US currency. The dollar strengthened 0.5% against the Japanese yen and 0.3% versus the euro.

Ishaq Siddiqi, London-based market strategist at ETX Capital, explained the dangers to the wider economy of higher crude values on the back of foreign aircraft strikes on Syria. "Once filtered through to the real global economy, the increase in oil prices will put a halt to the pace of economic momentum we are currently experiencing in major parts of the world.

"It's plausible that Brent oil prices could be over $120 a barrel in the coming days and, if oil prices spike even higher, it wouldn't be out of the question for the US Federal Reserve to hold off on tapering stimulus measures this year."

Threats of a $150 oil price take the markets back to July 2008 when Brent briefly traded at US$147.50, the highest intraday price on record. This was the height of the economic boom, which was followed by the autumn collapse of Lehman Brothers and then a full-scale banking crisis.

Crude then crashed to $40 but has largely been priced at over $100 since the middle of 2010, despite a relatively slow recovery in the world economy. Prices have been pushed upwards due to a mixture of stronger demand and supply problems. Oil supply from Opec producer Libya has already been reduced to a trickle after an armed group shut down a pipeline linking its largest western oilfields to the ports.

Article Source : http://www.guardian.co.uk

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Police called in over alleged fraud by Serco staff

Staff working on contract to transport prisoners alleged to have been misleadingly recording prisoners as ready for court

The justice secretary, Chris Grayling, has called in the City of London police to investigate alleged fraud by Serco staff working on a £285m contract to transport prisoners to and from courts across London and East Anglia.

Grayling said it had "become very clear there has been a culture within parts of Serco that has been totally unacceptable".

Last month, Grayling asked the Serious Fraud Office to investigate potential overcharging by tens of millions of pounds by the private security company G4S on a £700m contract for the electronic tagging of offenders.

The Ministry of Justice (MoJ) said detailed audit work initiated as a result of the investigation into the tagging contract in July had shown that some Serco staff were recording prisoners as having been ready for court when in fact they were not. This data is a key performance measure for the contract that could determine whether or not it is terminated.

It is thought the "potentially fraudulent behaviour" has been going on since last summer, when persistent delays in transporting prisoners between jails and courts led to an official improvement notice being issued.

It is alleged that instead of ending the delays, Serco staff simply fiddled the paperwork, for example by recording the time that the van arrived at court as if that meant prisoners were ready to appear in the dock.

There has been a culture within parts of Serco that has been totally unacceptable,' says justice secretary Chris Grayling

The ministry said in a statement: "MoJ has informed Serco in the light of the new evidence, it is putting the contract under administrative supervision with immediate effect. Serco have agreed to repay all past profits made on the prisoner escorting and custodial services contract and to forgo any future profits."

The decision to call in the City of London police is particularly embarrassing for Grayling as two of his department's major private sector suppliers are now being investigated for fraud at a time when he is trying to accelerate the pace of his probation and prison outsourcing programme.

Serco is also involved in the allegations involving overcharging on the bigger tagging contract, but unlike G4S it agreed to co-operate with an outside forensic audit to establish whether there had been any dishonest behaviour on its part.

Ministry sources said Serco had asserted that no member of the company's board had any knowledge of the alleged fraud on the prisoner transport contract. "If any evidence of corporate as opposed to individual wrongdoing emerges, MoJ will terminate this contract," it said.

The company has been put on three-month notice that it will have to overhaul its management, strengthen its internal audit procedures and open up its accounts to much more intense government scrutiny.

After three months a specially convened committee of government non-executive directors will assess whether the necessary changes have been put in place.

"Unless government is satisfied the changes made by the company are sufficient to guarantee the future integrity of government contracts, Serco will face exclusion from all new and future work with the government," the MoJ said.

The threat is serious for Serco which is one the government's most important private sector suppliers managing services that range from running prisons and local education authorities to the atomic weapons establishment.

Grayling said: "We have not seen evidence of systemic malpractice up to board level, but we have been clear with the company: unless it undertakes a rapid process of major change, and becomes completely open with government about the work it is doing for us, then it will not win public contracts in future. The taxpayer must know that their money is being properly used."

Chris Hyman, chief executive of Serco, said: "The justice secretary is right to expect the highest standards of performance from Serco. I am deeply saddened and appalled at the misreporting of data by a small number of employees on the contract.

"This is a very serious matter for the customer and for us. We will not tolerate any wrongdoing and that is why we have referred this matter to the police. It is also why I have immediately initiated a programme of change and corporate renewal.

"The overwhelming majority of our people work hard every day to deliver important public services and will share my deep concern about this matter."

Article Source : http://www.guardian.co.uk

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Bank of England governor reiterates pledge on low interest rates

Mark Carney leaves door open for fresh stimulus measures if Britain's 'fledgling recovery' is threatened - but sterling rises against the dollar and 10-year gilts rise after the speech

Mark Carney, the governor of the Bank of England, sought to convince a sceptical City that borrowing costs will remain on hold for the next three years on Wednesday, as he warned that Britain needs a prolonged period of low interest rates to make up the ground lost during the recession.

In his first big speech since taking charge in July, Carney left the door open for fresh stimulus measures if adverse market reaction to the Bank's new forward guidance regime threatened the UK's "fledgling recovery".

The governor said he was trying to provide certainty to businesses and households that the recent signs of growth would not be followed swiftly by a tightening of policy.

"We have a recovery that's just beginning. It's a very long way back. We are lagging just about everybody else in the advanced world. There's a lot of spare capacity", Carney said in a press conference following his speech to business leaders in Nottingham.

The City was left unimpressed by the renewed commitment to leave interest rates at their record low of 0.5% and to maintain the level of assets purchased under the Bank's quantitative easing programme at £375bn. Sterling jumped by half a cent against the dollar after he spoke, while yields on 10 year gilts rose from 2.73% before his speech, to 2.8% afterwards – the opposite direction to the move Carney might have hoped for.

Traders believe that the pick-up in economic activity will strengthen over the coming months and that the unemployment rate will fall to 7% – the threshold at which Carney might raise interest rates - well before the 2016 date pencilled in by the Bank.

The governor's announcement on Wednesday that banks would be able to reduce their holdings of liquid assets by £90bn, thereby making it easier for them to lend, strengthened the belief that Threadneedle Street was being too pessimistic about growth prospects.

But Carney insisted that the 7% jobless rate was a "staging post", which would not necessarily lead to borrowing costs going up but only require the nine-strong monetary policy committee to re-think its approach. The jobless rate stands at 7.8% currently.

He said the Bank's task was "to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth. We aim to get there in part by reducing the uncertainty that has held back growth."

The Bank of England governor, Mark Carney
Since the MPC adopted its new policy of forward guidance in July, investors have brought forward their expectations of a rate rise, amid strong economic data for the UK, and fears about the knock-on effects if the US Federal Reserve phases out its own $85bn(£55bn)-a-month programme of QE.

But the new governor insisted the Bank will not be swayed by decisions made thousands of miles away in Washington.

"While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK," he said.

City analysts said, however, that the speech lacked details of how exactly Carney and his colleagues will respond if the current market reaction persists.

"If market rates are at 'unwarranted' levels and rise further, putting recovery in the real economy at risk, what would the BoE do?", said Ross Walker, UK economist at Royal Bank of Scotland.

Simon Wells, of HSBC, said: "There was little attempt to talk the market down with threats of imminent easing. Even if Mr Carney is personally irritated or concerned by the rise in market rates, he probably knows that there is little chance of garnering a majority on the MPC for policy loosening at this stage".

Carney did explain how he plans to use the Bank's new powers to supervise Britain's banks, in order to underpin recovery. He confirmed that once individual banks have increased their capital levels to the new minimum level of 7% of their risk-weighted assets, the Prudential Regulatory Authority will relax liquidity rules, allowing them to hold less of their capital in the form of the most liquid instruments such as government bonds. In total, the Bank says the move could free up £90bn for new lending.

The governor also addressed fears that the government's various schemes to rekindle the housing market, coupled with the Bank's promise to keep rates low, risked stoking a new speculative bubble. He said there was little evidence of a boom, with mortgage approvals running at just over half their pre-crisis level, and debt servicing costs low.

But he added that the Bank was "acutely aware of the risk of unsustainable credit and house price growth and will be monitoring it closely".

Article Source : http://www.guardian.co.uk

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