The BoE has opted for a different method of stimulus from the quantitative easing measures that policymakers have previously employed. Under the new “Funding for Lending” programme, the BoE will provide cheap loans to banks, which are intended to tackle the increasing cost of mortgages and loans. Rates will be low and will be linked to the banks’ performance in maintaining or increasing lending to non-financial UK companies. The BoE also announced the activation of the Extended Collateral Term Repo Facility, which will provide short-term funds to banks to allow them to redress any shortfalls in liquidity. Sir Mervyn described the measures as “a temporary bank funding scheme to bridge to calmer times”
Chancellor of the Exchequer George Osborne warned that a shortage of credit is damaging businesses and costing jobs. He believes the measures will “support the flow of credit to where it is needed in the real economy”, but warned, “Things could still get worse before they get better”.
In response to the announcement, the Confederation of British Industry (CBI) described the BoE’s plans as “a sensible pre-emptive move” but warned that the “Funding for Lending” scheme will need to be “practical for banks to participate... and, most importantly... easily accessible for small and medium-sized businesses.”
The BoE’s view of the economy appears to have deteriorated over recent months. The UK has fallen back into recession and the euro debt crisis has created “a large black cloud of uncertainty”
Paul Dixon FPFS
Chartered Financial Planner