Chancellor George Osborne said the launch of an £80bn emergency scheme to kick start bank lending showed Britain was “not powerless to act” in the face of the eurozone crisis.
The Bank of England and Treasury yesterday revealed their “funding for lending” programme in an attempt to ward off a tightening credit squeeze and help to drag Britain out of its double dip recession.
The Bank painted a grim picture for households and businesses as it warned that credit availability was falling and borrowing costs rising as the eurozone woes take their toll on the banking sector.
The funding for lending scheme aims to break the log jam in credit hitting the economy, by offering banks cheap finance on condition they pass it on to borrowers.
Mr Osborne said: “Today’s announcement aims to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their home.
He added the initiative would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm”.
Under the scheme, British banks are being offered funding at low interest rates over a four-year period but it will be directly linked to bank lending performance to encourage lenders to increase loan availability and reduce rates.
For every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the scheme. Those that reduce lending will have to pay higher fees to use the scheme.
Bank of England governor Sir Mervyn King said the scheme created “strong incentives” for banks to increase lending. He added: “The more banks expand lending, the more they can use the scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available.”
Banks will be able to access finance at rates from around 0.75 per cent including fees – far cheaper than the equivalent 1.25 per cent to 2.5 per cent rate in finance markets.
The Bank will publish a breakdown of lending each quarter.
It is hoped that first-time buyers and small businesses will benefit the most, as they have been starved of affordable credit.
Experts have warned there are no guarantees the plans will address the core problem of companies reluctant to borrow or see banks lend more even with the carrot of cheaper funding.
The Bank hopes competitive pressure among banks will ease rates and borrowing terms substantially, which in turn would encourage firms to borrow.
The Bank made it clear on launching the scheme that it is designed to support the economy and not the banking industry.
The CBI said the scheme should provide a “real incentive” for banks and building societies to increase their lending to businesses and individuals.
Launching the scheme during a visit to crane and hoist manufacturer Street Crane in Chapel-en-le-Frith, Derbyshire, yesterday Mr Osborne said: “The British Government and the Bank of England are going to support lending to families who want to buy a home with a cheaper mortgage or businesses like this who want to expand and take people on so we are going to lend money to banks on the condition, and it’s going to be a very strict condition, that they lend it on to businesses like this.”
Chris Lindley-Smith, sales director at Street Crane, which employs some 200 people in the Peak District, said: “The announcement made by the Chancellor today is excellent news for small to medium manufacturing businesses.”