Bank of England to make more money available for business lending

Speaking (8-page / 40KB PDF) at the Lord Mayor's annual Mansion House dinner for the banking industry, its Governor Sir Mevyn King said that a new "funding for lending" scheme would promise more cash to struggling banks which promised to fund mortgages and business loans.

Long-term loans would be made available to banks at "rates below current market rates" linked to whether banks were able to sustain or extend their existing lending, he said. The scheme would, he said, be available within a few weeks.

In addition, the central bank intends to make at least £5 billion available to banks each month in the form of short term Extended Collateral Term Repo (ECTR) auctions. Loans accessed under the facility will be repayable over a six-month period and will be available to banks facing "exceptional market stresses". The facility will run "until further notice", the Bank said.

The announcements had been trailed earlier in the evening by Chancellor of the Exchequer George Osborne, who described them as "new firepower to defend our economy" from the liquidity pressures that were preventing lending to businesses. The Government is already backing a £20bn National Loan Guarantee Scheme intended to provide cheaper loans to small businesses, however loans remain subject to banks' usual lending criteria.

However King refused to rule out an extension of the central bank's controversial £325 quantitative easing (QE) programme, saying that the new measures would "complement" the "growing" case for further economic stimulus. He defended the programme, saying that it had "helped offset what would otherwise have been an extremely damaging contraction of the money supply". The central bank has also held the rate of interest it charges other banks to lend money to them at 0.5% since March 2009.

Angela Knight, the outgoing chief executive of the British Bankers' Association (BBA), said that the schemes, welcomed the announcements which she said would enable banks to play their "full part" in the UK's economic recovery.

"Banks want to lend to viable businesses and individuals," she said. "The BBA welcomes the Chancellor's indication tonight that the Government is ready to stand with the financial sector in making more money available to fuel the recovery. We look forward to seeing the details of the Chancellor's proposal but are ready and willing to get behind moves which help customers and encourage growth."

However, some analysts expressed their doubts that businesses would want to borrow given current difficulties in the eurozone. Graeme Leach at the Institute of Directors described the schemes as "defensive measures" which would be of limited effect.

"The liquidity scheme will need to be massively expanded if break-up and contagion spread across the eurozone," he said. "The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing, but the core problem remains: companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."

The Chancellor also said that the Government would "set out how we can do much more" to boost private sector growth through infrastructure spending over the next month.

"Credit is not the only area where we can use the global confidence in our balance sheet to boost private sector growth," he said. "We are already taking action to support new house-building and infrastructure investment through government guarantees. And we will build on our success in attracting UK pension funds and overseas sovereign wealth funds to invest with us in the overhaul of our country's infrastructure."