Bank to push ahead next week with plans to make bank loans cheaper despite a cool response from business leaders to its £80bn scheme
The Bank of England will push ahead next week with plans to make bank loans cheaper despite a cool response from business leaders who said the scheme will fail to reach firms struggling to secure loans.
Critics of the central bank’s scheme, announced by governor Sir Mervyn King in a speech at the Mansion House on Thursday, said the £80bn on offer would also fail to protect the UK’s banks against a bank run in the eurozone.
In a fresh move to kickstart the economy, the Bank of England will start offering cheap cash loans to high street banks next week. Banks will be able to swap poor quality assets like credit card debt and commercial real estate loans in return for a six-month cash loan under the central bank’s first Extended Collateral Term Repo Facility operation.
The new funds will be in addition to the £325bn already spent by the central bank through its programme of quantitative easing (QE) on government bonds held by banks and insurance companies.
The decision to activate the facility comes as UK banks have faced significantly higher funding costs than their eurozone counterparts, and analysts said the scheme should help take off some of the pressure.
“This is a more direct approach to reduce the funding costs of banks [than QE] and is a much better way of doing it,” said Guy Mandy, a strategist at Nomura. “It’s one of the better moves they (the BoE) have made.”
In recent months lenders have come under fire from business and consumer groups for passing on more expensive loan rates to mortgage customers and companies that are struggling to surveive in the recession.
Bank share prices jumped on the news that the scheme would begin operating from 20 June. The banks are expected to begin offering cheaper loans almost immediately after the announcement sent their own funding costs tumbling on wholesale markets.
However, several business leaders said the scheme would prove to have a limited impact.
Graeme Leach, chief economist at the Institute of Directors, said: “Facing a bombardment from the eurozone the chancellor and governor are calling up the reserves. Defensive measures need to be put in place and they’re making sure everyone knows they’ve done it. The extended liquidity and funding for lending schemes are welcome, but limited.”
John Longworth, director general of the British Chambers of Commerce, said “too many question marks” remained over how the schemes would work. “How, for example, will the funding for the lending scheme be set up and monitored so that it does in fact deliver money to the real economy?
“Additional quantitative easing and the credit easing programme have not had the desired impact on the real economy. Can the chancellor and governor make sure these sequels trump the originals?”
The Treasury believes that making borrowing cheaper will kickstart the economy and has the backing of several policymakers at the Bank of England. King said in his speech that the weak state of the economy may encourage the monetary policy committee, which he chairs, to increase QE alongside the new scheme.
The central bank already offers regular cash loans in return for high quality assets, but demand at these operations has been muted as banks have wanted to hang on to their safer collateral.
To bolster take-up of its new liquidity tool, the BoE has cut the price of its loans by a full percentage point, and is offering a much longer loan maturity than the 30 days it envisaged when it launched the scheme in December. The Bank will lend the money at a minimum of bank rate, which is currently 0.5%, plus an additional 25 basis points.
It said it would hold at least one Extended Collateral Term Repo Facility a month until further notice and would offer at least £5bn at each operation.
Jonathan Portes, head of macro-economic think tank NIESR said central bank support can stop a meltdown across the banking system in times of severe stress.
However, just making credit cheaper may amount to pushing on a string, Portes said. “It may not be about the banks but about business confidence,” he said. “Most of the problem with business investment is on the demand side.”