Will Bank of England’s “funding for lending” scheme encourage borrowers?

Publication date: 13 July 2012
Author: Mark Deans, Moneycorp

The deployment of 17,000 battle-hardened troops to check handbags and intercept picnic-hamper smugglers at Olympics venues is symptomatic of the coalition’s increasingly draconian approach to internal security. More evidence of this hard-line attitude was revealed by a Commons committee yesterday when it questioned the government’s categorisation of arms exports to totalitarian states. Armoured personnel carriers, sniper rifles and machine guns are generously described as “crowd control goods” as long as their recipient is a friendly despot with significant oil reserves.

Were it not that a fifth of the Army is honing its picnic-hamper detection skills, troops might have found themselves using those crowd control goods to protect banks against a mad onslaught of eager borrowers today. This morning the Bank of England will announce details of the “funding for lending” scheme first revealed at the Mansion House dinner a month ago. In essence, £80bn will be made available to banks on condition they lend it on to small and medium-sized businesses (SMEs). The Bank’s intention is that the scheme should increase total lending by 5%. According to Sky News, the Bank will keep tabs on the scheme’s progress by publishing quarterly figures to show which bank has lent what.

Nobody has a clue whether the scheme will work. Although it has all the features of “being seen to be doing something”, that does not necessarily mean it will be ineffective. However, the same old obstacles remain. Banks are under pressure to build their reserves in case of a disaster in Euroland; lending money, whatever its source, eats into those reserves. And there are real doubts about companies’ appetite for debt. Those doing well are reducing it; those wanting to set up a cactus rental operation in Streatham will be no better a credit risk tomorrow than they were prior to the new scheme.

For those reasons it is doubtful whether the Bank’s announcement at 11 o’clock will have any direct bearing on the value of sterling. Investors tried, and failed, to find inspiration to buy or sell the pound yesterday and they will probably have similar lack of success today. With no UK data and precious few from other major economies the aimlessness of exchange rates is likely to continue into the weekend. In the last 24 hours the pound has held steady against the euro and the Swiss franc and is a touch lower elsewhere, but only by fractions of a cent.

The media are making much of a slowdown in the pace of China’s economic growth, reported earlier this morning. The truth is, though, that quarterly growth of 1.8% in Q2 was slightly ahead of forecast, and the 7.6% annual increase in gross domestic product was exactly as expected. Chinese industrial production (9.5% Year-on-Year) and retail sales (13.7% YoY) were almost identical to the previous month’s figures.

Today investors will have to make do with Spanish and Italian inflation, Swiss and US producer prices and the provisional Michigan index of US consumer confidence. Italy’s auction of three-year bonds is not expected to encounter any difficulties. So it looks like more of the same for currencies.