Bank of England warns insurers against too fast price rises
The Bank of England’s chief economist Spencer Dale, told the Association of British Insurers on Friday that the recession would be over by the end of the year and warned them not to increase prices too fast.
“The darkest hour is just before the dawn. Although immediate prospects appear bleak, the substantial economic stimulus that is underway means that there are grounds for thinking that economic conditions may start to improve later this year’” he said
“As we go through 2009, I believe it is most likely that the pace at which output is contracting will ease and that we will see some signs of recovery by around the turn of this year.”
And he warned insurers against raising premiums to recoup investment losses. “There is a limit to how much insurance premiums can be raised before they exceed the profit margin associated with a particular transaction. Higher prices can have the same effect as the complete withdrawal of supply,” he said.
His reasons for predicting recovering included:
- Stimulus package significantly greater than that seen at comparable stages of the recessions in the 1970s, 80s or 90s
- Supply chains around the world more integrated speeding the world downturn, as the effects of falling demand in a few countries were translated into lower orders and production in many in a matter of weeks. This will work in reverse
- Lower stock held by companies so they will need to step up production earlier
- Labour market flexibility allowing wages to be frozen or even cut, hours reduced and working practices changed.
- Bank interest rate down from 5% to an historic low of just 0.5% in a matter of months.
- £75 billion of asset purchases to boost the supply of money and improve the functioning of corporate credit markets.
- Purchase of £13bn of gilts from investors
