FLS fails to make its mark as lending shrinks again

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Fresh doubts over the effectiveness of the Bank of England’s flagship scheme to improve the supply of credit have been raised after figures showed a continued contraction in lending to firms.

The Bank attributed the drop to “a desire by several major UK lenders to reduce the scale of their so-called ‘non-core’ loan portfolios”, although it said banks expect net lending to pick up “modestly” during the second half of the year.

Despite offering financial institutions cheap funds through its Funding for Lending scheme, the central bank reported a £4.5 billion contraction in net lending in the three months to May, in line with a similar drop during the previous quarter.

Howard Archer, chief UK economist at IHS Global Insight, said the fall reflected companies’ reluctance to take on more debt in the face of the difficult economic environment, but this trend could be reversed if conditions improve.

He added: “As demand for credit does pick up, it is vitally important for UK growth prospects that all companies who are in decent shape and who do want to borrow can do so, and at a non-punishing interest rate.”

The Bank did report a fall in loan prices for larger companies, but said rates were “little changed” for smaller firms.

Louise Beaumont, co-founder of alternative finance provider Platform Black, said there was “a touch of irony” in the timing of the report, which followed Wednesday’s revelation that the Bank’s monetary policy committee (MPC) had voted unanimously to keep its money-printing programme on hold.

She said: “Barely a day after the MPC minutes confirmed the Bank is falling out of love with quantitative easing, its own data shows that precious little of the monetary stimulus is filtering through to the real economy.”