The Bank of England has unveiled a scheme designed to boost lending to first time buyers and small companies, in a bid to boost the country’s struggling economy.
The scheme, called ‘funding for lending’, is an £80bn facility provided to banks and building societies by the central bank to offset the higher costs currently faced by financial institutions in wholesale money markets.
Chancellor George Osborne welcomed the scheme, saying it shows that Britain is not “powerless to act” in the face of the Eurozone crisis. Business groups are optimistic that the scheme will have more effect than the previous project Merlin, which failed to raise the level of net lending by banks.
“This announcement aims to make mortgages and loans cheaper and more easily available, providing support to businesses that want to expand and families aspiring to fill their own home. This initiative will inject new confidence into our financial system and ensure that credit is able to flow to where it is needed” stated Osborne.
Governor of the Bank of England, Sir Mervyn King, said that the new scheme aims to ‘free up the log jam’ in credit, by offering banks cheap finance with the condition that savings are passed on to borrowers. Access to cheaper funding should also help to increase competition and thus drive rates down even further” he said.
Banks access funds from international lenders in order to raise funds and supplement their lending, the cost of raising these funds has increased as economic outlook in the UK and euro zone has failed to improve.
The Bank of England will charge a small fee for banks to access the facility, which should be significantly below the cost of raising funds from other sources..