March 26 (Bloomberg) -- Bank of England Governor Mervyn King said the central bank is discussing ``longer-term'' solutions to the credit crisis with U.K. financial institutions and will stick to current emergency lending plans for now.

King said in testimony to lawmakers that any plan of action must require banks' shareholders to shoulder the risk of losses and assist lenders to finance existing commitments, rather than subsidize new business or securities sales. Speaking in Brussels, European Central Bank President Jean-Claude Trichet said today further market tensions ``can't be excluded.''

Lawmakers and economists have criticized King for refusing to loosen borrowing requirements to ease renewed money-market strains that yesterday pushed the cost of borrowing funds to the highest since December. Michael Fallon, a Conservative lawmaker questioning King today, has said the central bank is responding to market turmoil at a ``snail's pace.''

``We are discussing with the banks how a longer-term resolution of the problem might be reached,'' King told Parliament's Treasury Committee in London. Emergency central bank loans ``can be only a temporary measure but it can be a useful bridge to a longer-term solution.''

King said the bank will renew a three-month auction from January that expires April 15, with the amount of funds on offer to be determined at the time. He also expects inflation to slow ``towards'' the Bank of England's 2 percent target, ``starting later this year.''

Vigilance

Central bankers around the world are trying to limit damage from the U.S. subprime mortgage slump. Trichet said that ``continued tension in the credit markets can't be excluded'' and, ``given the heightened uncertainties, vigilance is of the essence.''

The Federal Reserve and the ECB have been quicker than the Bank of England in trying to smooth market tensions. The U.S. central bank has lowered interest rates at the fastest pace in two decades and has also pushed its $900 billion balance sheet into the front lines to quell a collapse of brokerage firms and market making in mortgage-backed securities.

The ECB was the first central bank to respond to the seizure of credit markets in August and has managed to avoid a crisis on the scale of the run on Northern Rock Plc in September.

The Bank of England has reduced its benchmark rate twice since December, taking it to 5.25 percent, and offered no more than 10 billion pounds ($20 billion) in emergency funds to financial institutions on any given occasion.

`Sense of Fragility'

``I don't think there is any significant difference'' between the Bank of England and the ECB, King said today. ``There is still a sense of fragility, and that's why central banks need to be ready to provide the liquidity that is necessary.''

King said it's difficult to say that banks refusing to lend to each other are ``behaving irrationally,'' given the uncertainties about their potential exposure to losses and writedowns at present.

The Monetary Policy Committee's two interest-rate cuts haven't fed through to lower costs for home loans, adding to the case for further reductions. Average mortgage rates for Britons are still about where they were in August, King told lawmakers in London today.

``We have to watch and monitor'' spreads between borrowing costs ``in order to work out by how much we should be changing bank rate,'' King said. When asked if wider margins make the bank more disposed to lowering interest rates, King said: ``Yes.''

Rate Forecast

Today's testimony prompted Global Insight Inc. Chief European Economist Howard Archer to bring forward his call for the next Bank of England interest-rate cut. He now sees a quarter-point reduction to 5 percent in April instead of May.

``King acknowledged that current credit conditions mean that the MPC is more predisposed to a cut in interest rates,'' Archer said in a note. ``King highlighted the recent further tightening in credit conditions, noting that it had moved into a new and difficult phase. This is highly significant.''

Policy makers were challenged by lawmakers over their response to the crisis, with Britons facing rising home loan costs as their introductory mortgage rates expire and lenders refusing to pass along savings from lower central bank rates.

`Losing the Battle'

``People are not going to be able to refinance their mortgages,'' said Jim Cousins, a member of the Treasury Committee from the ruling Labour Party. ``You're losing the battle on both fronts. People can smell it.''

Charles Bean, chief economist at the central bank, denied that the turmoil had extended far enough into the economy to warrant new measures to assist homeowners.

``Where we are at the moment is not in an extreme slump in the housing market or in the economy in general,'' he said. ``We're not in a position where special measures are required at this juncture.''

King said policy makers face challenges in setting interest rates as the economy slows while inflation may accelerate above the government's 3 percent limit as commodity prices rise.

``There's a difficult balancing act at present because there are risks at either side,'' he said. ``There is concern and lack of confidence in all financial markets around the world. This is not an economy that has completely ground to a halt but we are looking ahead and we do expect some slowing.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

Last Updated: March 26, 2008 08:45 EDT