Bank and Treasury look to boost bank lending
Mervyn King: ”The other effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over our economy too”
14 June 2012 Last updated at 22:41
The Bank of England will launch two new stimulus packages in response to the worsening economic outlook, governor Sir Mervyn King has said.
Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies.
It will also offer banks access to short-term money to deal with “exceptional market stresses”.
Chancellor George Osborne said the measures would “inject confidence” into the financial system.
They would also “support the flow of credit to where it is needed in the real economy”, Mr Osborne said in his annual Mansion House speech.
“We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep.”
Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen.
The crisis had also created a “large black cloud of uncertainty” over the global economy, meaning companies and households were cutting back on spending.
Signs of a slowdown in China, India and other “previously buoyant emerging economies” added to the “ugly picture” and meant further action was needed, the governor said.
The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets.
However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE.
Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending.
“Today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times,” Sir Mervyn said.
“The Bank and the Treasury are working together on a ‘funding for lending’ scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty.”
The BBC’s business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%.
The governor said he hoped the scheme would be in place “within weeks”.
The second measure he said the Bank would be introducing was a scheme outlined in December last year – called the Extended Collateral Term Repo Facility – to address a shortage of liquidity in the banking sector.
This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash.
Further details of the short-term liquidity scheme would be announced on Friday, he said.
“I want to make it clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead.”
Spain is the latest country to be dragged into the debt crisis, with Madrid agreeing a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.
Spain’s borrowing costs on the secondary market – an indication of investor confidence in its ability to repay its debts – also hit 7% on Thursday, a level widely seen as unsustainable. Italy’s borrowing costs also rose sharply.
With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector.