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The boss of Britain's biggest supermarket chain put pressure on the monetary policy committee to slash interest rates at a private meeting with the Bank of England's governor, Mervyn King, in the days leading up to this week's unprecedented 1.5 percentage point rate cut, the Guardian can reveal.
Sir Terry Leahy, the chief executive of Tesco, outlined his concerns about the economy and argued for a big cut in the cost of borrowing to help restore consumer confidence. Details of the breakfast-time meeting in Threadneedle Street emerged as the chancellor, Alistair Darling, ordered Britain's major high street banks and mortgage lenders to slash their borrowing costs by the full 1.5 points - and most of the banks complied.
Darling summoned the bank bosses to the Treasury yesterday morning and told them the economy was on the edge of a precipice and they had to help prevent what could be the longest and deepest recession since the second world war.
Leahy also made his views clear to David Blanchflower, the economist on the monetary policy committee (MPC) who has been leading calls for lower interest rates to head off a deep recession. Blanchflower urged a cut in the cost of borrowing every month this year, but was outvoted by other MPC members. As the economy has deteriorated in recent weeks, his voice has carried more weight.
Tesco accounts for more than 30% of the grocery market and more than £1 out of every £8 spent on UK high streets, and Leahy is on the prime minister's committee of business leaders.
At the Treasury yesterday, the chancellor told the banks the £37bn bailout of RBS, Lloyds TSB and HBOS had prevented the collapse of the banking system and it was their duty to cut their lending rates in line with the Bank of England's 1.5 point cut.
It is understood the banks protested, telling Darling they urgently needed to rebuild their finances. But the chancellor made it clear they did not have a choice.
However, after the meeting, a senior banking source said this was the last time they would be "brow-beaten". Any further moves by the Bank of England were unlikely to be passed on, he said.
The rate cut will save many homeowners hundreds of pounds a month in mortgage repayments, relieving some of the pressure on household budgets. It could also boost the retail sector, which is witnessing a huge slowdown in spending.
Around 10% of borrowers are on a standard variable rate (SVR) mortgage, while 40% have deals tied either to the base rate or their lender's SVR.
But lenders have scrambled to pull their best home loans deals this week, and tracker mortgages that follow the Bank's base rate have all but disappeared.
A new estimate suggested house prices could fall more than 50% in the current downturn.
The latest forecast from Tradition Future HPI, which uses the futures market as a guide to where house prices are heading, is its grimmest to date. It predicts the average house price will fall to £114,347 by October 2011, a drop of 43% from the peak in August last year.
Lucy Neville-Rolfe, Tesco's director of legal affairs, refused to confirm Leahy's meeting with Mervyn King, but said: "The MPC did a very brave thing." She added that the banks must now be put under pressure to ensure households and small businesses feel the benefit: "Our concern is to make sure the banks pass the rate cut on."
- Tesco
- Bank of England
- Supermarkets
- Retail industry
- Alistair Darling
- Banks and building societies
- Mortgages
- Property
- First-time buyers
- Savings
- Economic policy
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