Mervyn King, the Bank of England Governor, detailed plans to provide cheap long-term funding for banks that would then be loaned on to businesses. The lack of bank lending despite the availability of credit to them has been highly criticised in the past so this is a direct plan to get high street banks passing money on through loans to businesses.
As long as they do lend money at cheap rates, banks will be able to swap loans to individuals and businesses for high-quality gilts.
King added that banks will be able to borrow up to £5bn a month which is expected to be made available for at least the next three months.
While not confirming that further quantitative easing being on the cards, he did admit that instead of buying corporate debt, he would prefer to build up his pile of government bonds in addition to the £325bn it has spent on them so far.
Chancellor George Osborne, meanwhile, outlined the ongoing strategy of tight fiscal policy and loose monetary policy as the right macroeconomic mix to help rebalance the UK economy.
“Maintaining low market interest rates is also crucial in an economy as indebted as the UK,” he added, “as it smoothes the process of deleveraging.”
He also said how he is going to tackle the banks and “stop problems caused by risk-taking in the City of London spilling onto our high streets and putting taxpayers’ money at risk.”
High-street banking will be ring-fenced so that taxpayers are better protected when things go wrong; the government will be able to bail in creditors when a bank fails rather than turning to the public purse.
“The immediate priority is to counter the tightening of financial conditions and increase in bank funding costs caused by the crisis in the eurozone,” he said. “Supportive monetary and financial conditions are a core part of our strategy, so we must prevent an unplanned tightening undermining the recovery.”
To this end Osborne is to amend the Financial Services Bill to give the new Financial Policy Committee the objective of supporting the economic policy of the Government. It will be a legal requirement for the FPC to report, for every action it takes, how that action is compatible with economic growth as well as stability.
