The Bank of England and the Treasury are eyeing up an extension of the £80bn Funding for Lending Scheme (FLS), according to the latest minutes from the Bank's Monetary Policy Committee.
The FLS was established last summer and offers commercial banks cheap loans providing they pass on the money to customers in cheaper mortgages and loans to small businesses.
It has resulted in an increase in the availability of mortgage finance and also brought down the average costs of home loans. The FLS has, however, so far had no discernible impact on the availability of credit for small companies and recent figures suggest aggregate bank lending remains negative.
But the minutes of the latest meeting of the MPC show that members of the nine-strong, rate-setting committee "saw merit in possible extension to the FLS that would boost lending further".
Kevin Daly, an analyst at Goldman Sachs, welcomed the shift. "Given the constraints on fiscal policy, reducing the cost and easing the availability of credit should be the top priority for UK policy makers," he said.
Mr Daly added that one option for extending the FLS would be to ease the financial terms under which commercial banks can access the funding scheme. He also suggested that the authorities should make access to the new, enhanced scheme dependent on the extent to which lenders made use of the existing one to encourage take-up now.
The minutes also revealed that the MPC again split six to three against increasing the size of the Bank's £375bn asset-purchase scheme by £25bn earlier this month. The three members who voted for an increase were the Bank's Governor, Sir Mervyn King, director of markets Paul Fisher and external member David Miles. This is the third month in a row that the Governor has found himself in a minority on the MPC over asset purchases.
At the end of June, Sir Mervyn will hand over the Governorship to Mark Carney, who has made it clear that he thinks there is still scope for monetary policy to boost the British economy.
The minutes outlined the various arguments in the debate. Some members felt that "further asset purchases, by lowering longer-term interest rates and supporting a range of asset prices, could facilitate a smoother path towards the economy's new equilibrium, help prevent a more-persistent reduction in spending, and thereby avoid potentially lasting damage to productive capacity".
Others apparently warned that more quantitative easing could stoke inflationary pressures.
"Medium-term inflation expectations had drifted upwards in recent months, and a further easing might exacerbate this movement and prompt renewed weakness in sterling, with implications for wages and prices," the minutes recorded.
This was the first meeting of the MPC since the Chancellor, George Osborne, altered the remit of the Bank in his March Budget, giving the committee the right to look through temporary spikes in inflation when setting interest rates. But the language of the minutes indicates the committee felt the change merely confirmed what the MPC has been doing already in recent years when consumer prices inflation has been consistently above the official 2 per cent target.