Earlier indications that the Bank of England’s Funding for Lending scheme (FLS) was easing the loans log-jam appear to have been overstated.
Lending from some of the main banks fell in the final three months of last year, heightening the possibibility of some new ideas emerging at this week’s monthly meeting of the monetary policy committee (MPC).
The FLS, launched in August, made £80 billion available to the main lenders and the Bank will be disappointed that an initial £1bn surge in loans has not carried through to the end of the year.
It has helped reduce the cost of mortgages to home buyers. But small firms, who were expected to benefit, have not done so and there is some evidence that it is merely cutting borrowing costs to those who would have received a loan anyway.
The banks claim demand is not there and that they are also under pressure to conserve cash to bolster their balance sheets. It is also important to consider the timescales involved. Taken over six months, Royal Bank of Scotland says its core bank has increased net lending by £1bn.
But there are suggestions that some firms have given up on traditional sources of lending because of a failure to get what they need or because the costs of borrowing have become prohibitive.
The Bank of England will now be giving thought to extending the range of policy tools at its disposal, as mentioned in the minutes of the last meeting of the MPC when there were strong hints that the FLS was not doing its job, despite the committee saying it was performing in line with expectations.
Sir Mervyn King, the Bank’s governor, joined fellow committee members Paul Fisher and David Miles in calling for a £25bn extension to the quantitative easing programme and it would be no surprise to see a majority of the nine members vote in favour when they reveal their decision on Thursday.
Some fear that further asset purchases will fuel inflation, but the Bank has already conceded that inflation will rise to around 3 per cent and that it is worth tolerating higher prices and a fall in sterling in order to stimulate export activity.
It will be four years tomorrow since the base rate of interest was cut to 0.5 per cent and a further cut is not out of the question.
There has even been talk of negative interest rates whereby the banks pay a fee on the money they are not lending, though this would devastate the savings sector. A more likely option is for the Bank to vary the range of assets it buys.
As for the government’s response, Chancellor George Osborne must be wondering what more can be done following the failure of Project Merlin and the short-lived credit easing plan. Yesterday’s data may prompt more head-scratching ahead of his 20 March Budget.
Short-termism needs a long-term solution
short-termism has been a long-term problem and it is no surprise that a poll of members of the Institute of Directors finds more than 90 per cent believe it to be an impediment to growth.
But firms have also become more short-termist since the financial crisis, suggesting that the problem is getting worse.
Quarterly reporting should be scrapped and measures introduced to encourage investors to stay in businesses for longer.