Bank chief says he can’t guarantee easier loans

There is no guarantee that borrowing will become easier despite an emergency move to pump £75bn into the economy, Bank of England governor Sir Mervyn King has warned.

Sir Mervyn did tell yesterday’s heated meeting of the Treasury Select Committee that the latest round of quantitative easing (QE) should limit the shortfall in bank lending that is hurting the recovery.

The governor also told MPs he could not guarantee that banks would loosen their purse strings at a time when they are under pressure to hoard more capital.

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Sir Mervyn’s evidence hearing came after Martin Weale, who sits on the Bank’s Monetary Policy Committee (MPC), warned the economy was at risk of contracting in the final quarter of 2011.

Mr Weale said: “Obviously there is the risk of another recession and it’s higher than one might have thought a few months ago.”

Sir Mervyn was criticised for not doing enough to help small to medium enterprises (SMEs) and for launching the latest QE round at the risk of increasing inflation, which hit 5.2 per cent in September.

The Bank hopes boosting QE from £200bn to £275bn will help the recovery by encouraging financial institutions to lend more and buy more assets such as shares.

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Sir Mervyn said: “I can’t guarantee that it means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done. I think the action will make a difference to the amount of lending, but it certainly doesn’t guarantee that lending to the real economy is positive.”

Leeds East MP George Mudie accused the Bank of ignoring the Government’s calls to help SMEs but Sir Mervyn dismissed this as “complete nonsense”.

He said: “What really matters for SME lending is to alter the incentives banks have to lend to them.”

Sir Mervyn also came under fire for waiting too long to launch QE2, but he said the bank was finally prompted to take action by the marked deterioration in the eurozone and world economy.

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