Bank sees a long battle ahead to boost UK borrowing
New scheme will take some time to bear fruit for economy, predicts top official
Thursday 30 August 2012
The Bank of England is braced for a long battle to get credit flowing through its new, £80bn Funding for Lending scheme, a senior rate-setter warned yesterday.
The FLS was launched at the beginning of August to provide cheap funding for banks, on condition that they grow their lending to businesses and home buyers to help drag the struggling UK economy out of recession.
Minutes of the Bank's Monetary Policy Committee's latest meeting showed policymakers "encouraged" by the initial impact of the move as a host of lenders tapped the funds to cut mortgage rates. But the Bank's executive director for markets, Paul Fisher, yesterday said that it would take some time to bear fruit for the wider economy.
In a presentation hosted by the Association of Corporate Treasurers, Mr Fisher said: "We don't expect this to be something that will cure the economy in a few months. It will take a little while to pass through... We have seen an initial flurry (of interest from banks) but this isn't a sprint – we would liken it a bit more to a middle-distance event."
His remarks came in the wake of warnings from the Deputy Prime Minister Nick Clegg that a "short, sharp" battle against recession is "turning into a longer-term process of economic recovery and fiscal restraint".
While the Bank will take its time to judge the impact of the FLS on constrained business lending conditions, the early signs are that the new funds have had a mixed impact on the mortgage market.
Although the cost of loans for those with bigger deposits has fallen sharply, figures from financial information firm Moneyfacts have shown costs for first-time buyers with just 10 per cent deposits actually rising since the FLS was launched, adding £118 on average to the cost of a two-year fixed rate deal. Worryingly for the Bank, Santander last week also hit borrowers with a rise in its standard variable rate on mortgages last week.
The FLS was unveiled by the Bank's Governor, Sir Mervyn King, in June as the latest squalls in the eurozone's debt storm sent bank-funding costs soaring higher. Alongside the funding initiative the Bank is also holding monthly auctions at which banks can bid for cheap cash in return for a wide range of collateral.
The measures come on top of the Bank's current quantitative easing (QE) programme of government gilt purchases, which it expanded to £375bn in July. The MPC is coming under more pressure to improve the impact of QE by buying up a bigger range of debt directly, although Mr Fisher deflected the calls yesterday.
Questioned on whether the Bank had weighed up buying other assets such as mortgage-backed bonds – as called for by outgoing rate-setter Adam Posen – Mr Fisher stressed the Bank had decided it would bring too much risk on to the public sector.
The committee is also concerned that the bonds could be hard to sell back to banks when the MPC eventually decides to unwind the policy.
"We think we can have the same benefits … by taking them as collateral rather than buying them outright," he said.
The Governor, Sir Mervyn, has been adamant that the Bank will not buy up significant quantities of private sector debt under QE.
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