The Bank of England is set to launch further emergency measures to boost the UK economy, it was announced last night.
In his speech at the annual Mansion House dinner in the City of London, the Governor, Sir Mervyn King, said that two new stimulus packages would be rolled out in response to the worsening economic outlook.
Banks will be offered low-cost loans to encourage lending to companies, a plan that is anticipated to increase annual lending flows to the economy by about 5% or GBP80bn.
This ‘funding for lending’ scheme from the Bank of England and the Treasury is expected to be launched within a few weeks. It will be linked to the performance of banks in sustaining or expanding their lending to the UK’s non-financial sector during the current period of heightened uncertainty.
Separately, banks will also be given access to short-term liquidity, with at least GBP5bn a month made available to help them deal with “market-wide stress of an exceptional nature”.
Called the Extended Collateral Term Repo Facility, this scheme is intended to mitigate prospective risks to financial stability arising from a shortage of sterling liquidity in the banking sector.
Commenting on the need for measures to help stimulate the economy, Sir Mervyn said that the economic outlook had deteriorated in recent weeks and the eurozone crisis had created a “black cloud of uncertainty” over the British economy.
Chancellor George Osborne, who also spoke at Mansion House, said that the latest stimulus measures would “support the flow of credit to where it is needed in the real economy”. He also announced that the new financial regulation regime will be required to focus on economic growth as well as financial stability.
Previously the Bank of England has injected GBP325bn into the economy through quantitative easing (QE) programmes, under which it buys up government bonds. Although the central bank has decided against further QE at this stage, the Governor hinted that it was an option for the future, saying last night that “the case for a further monetary easing is growing.”