LONDON, June 26 (Xinhua) -- The Bank of England (BoE), or the British central bank, Wednesday defended its ultra-low interest rate and asset purchases policies, warning the potential impact or risks to financial system and real economy from sharp increase in interest rates.
In its semi-annual Financial Stability Report, the BoE warned that the outlook for financial stability is still clouded by risks from a weak and uneven global recovery and imbalances in the euro area.
"Risks could crystallize if global long-term interest rates were to rise abruptly from currently still historically low levels or if credit spreads were to widen," it said.
The BoE also argued that British households remain highly indebted and there is a need to assess the vulnerability of borrowers and financial institutions to sharp upward movements in interest rates and credit spreads, and the extended period of low interest rates may have led some financial market participants to become exposed to a substantial rise in long-term rates.
In a speech delivered at the Global Borrowers and Investors Forum at the same day, David Miles, External Member of the Monetary Policy Committee (MPC) of BoE, said that the evidence for the argument that asset purchases by central banks have caused generalized bubbles in financial asset prices is weak.
"In the UK there is more evidence that the Bank's asset purchases helped to stop an anti-bubble, that is, a downward spiral in asset prices that would have further damaged the real economy and become dangerously self-reinforcing," he said.
"The unwind of the huge expansion of the central bank balance sheet need not be complete because commercial banks will be very likely to want to hold more reserves than the tiny sliver that they thought adequate before the financial train wreck," Miles added.
On Tuesday, however, Mervyn King, governor of BoE, told lawmakers in London that: "Clearly the level of interest rates and the scale of asset purchases will have to be unwound and we must return to more normal conditions at some point. That point is not today."
Last week, Ben Bernanke, chairman of Federal Reserves, said the U.S. central bank may taper its quantitative easing policy late this year, if the unemployment rate drops below 7 percent. The monetary normalization signal has been causing the market volatility and wide discussion recently.
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