Bank of England launches £80bn lending scheme
The Bank of England will finally turn on the taps in its £80bn scheme to boost lending to credit-starved firms this week as rate-setters ponder more action to tackle the UK's double-dip recession.
From Wednesday – the first day of the Funding for Lending scheme on which the Government's hopes rest to revive the economy – banks will be able to swap loans and securities for ultra-safe Treasury bills, which they can swap in turn for cash to lend into the real economy.
The beginning of the 18-month initiative comes after shock official estimates revealed a 0.7 per cent slide for the economy between April and June – the worst quarter for three years.
Individual lenders will be allowed to draw down Treasury bills worth up to 5 per cent of their total stock of business and mortgage loans as of the end of June, for a knockdown fee of just 0.25 per cent. If their lending levels fall they are charged more for the loans, but those who have boosted lending will be able to draw additional funding at the cheap rates.
As of March, lenders had £265bn in loans and securities placed with the Bank able to be swapped for Treasury bills. The urgency of the credit problem was underlined by the Bank's latest trends in lending report, which showed a worrying £3bn fall in business loans over the most recent quarter.
The Bank of England's markets director Paul Fisher told MPs this month that nearly 100 banks and building societies had signed up to the scheme. Analysts have expressed doubts over its size and questioned the demand among nervous businesses, but Mr Fisher said: "Any sustained growth of lending would be much better than where we are now, particularly in a world where our assessment was that lending growth was more likely to fall than to go up."
The Bank has also handed out £9.2bn in cheap six-month funding to banks in two auctions via its so-called Extended Collateral Term Repo facility, announced alongside Funding for Lending in June.
Its monetary policy committee is expected to hold fire on more money-printing on Thursday after voting for an extra £50bn in quantitative easing at the beginning of the month. Barring another euro flare-up, more QE is unlikely until the autumn, although members may again debate cutting rates below the current all-time of low 0.5 per cent.
IHS Global Insight's Howard Archer said: "The MPC will likely want to see what impact Funding for Lending is having before considering further QE."
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