A day of gloom for the global economy was capped late last night by the revelation that private equity group TPG had walked away from its rescue of Bradford & Bingley.
The dramatic development, which will see the bank rescued instead by City institutions, came as Moody’s downgraded B&B’s credit for the second time.
The day began equally poorly when US Treasury secretary Hank Paulson warned there were months of turmoil to come, saying the near-term economic outlook remains difficult and the global inflation threat is serious.
“The capital markets problems and turmoil are going to take a while also, and as I said, this housing correction will be going on for some time,” he said, following a meeting with Chancellor Alistair Darling and top bankers in London.
Paulson, who has spent the past five days in Europe, said that inflation rather than the credit crunch, was the top concern for banks but offered no hint as to how he thought the Federal Reserve or other central banks should respond.
His warning came as the spectre of inflation caused the European Central Bank to hike interest rates for the first time in over a year, taking its key interest rate to 4.25 per cent from 4 per cent, its highest level in seven years. The decision to raise rates was unanimous with president Jean-Claude Trichet saying he had “no bias”, alleviating market fears of a series of hikes, while indicating he would do whatever it took to tackle inflation.
Inflation in the 15 countries using the euro was a record 4 per cent in June, more than double the ECB’s 2 per cent target. “Today’s rate hike should have been a one-off to strengthen the ECB’s image as an inflation fighting knight.
They need to be cautious not to become a Don Quixote,” said Carsten Brzeski, economist at Dutch bank ING.
“An interest rate cut is desperately needed to support the rapidly deteriorating economy. But inflationary pressures continue to tie the Monetary Policy Committee’s hands,” said Vicky Redwood, economist at research house Capital Economics.
Fears the UK is on the brink of recession were heightened yesterday as the index of activity in the service sector fell to 47.1 per cent in June from 49.8 in May, the worst reading since October 2001, according to the Chartered Institute of Purchasing and Supply’s monthly survey.
The business expectations index fell to its lowest level in the 12-year history of the series.
The data came at the same time as the Bank of England’s quarterly credit conditions survey revealed that default rates on secured lending to households rose by more than anticipated in the second quarter with lenders expecting a further increase in the coming months.
“We now judge that a technical recession before the end of 2008 (i.e., two consecutive quarters of negative growth) is more likely than not,” said Peter Newland, economist at Lehman Brothers.