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Bank and Treasury look to boost bank lending Bank and Treasury look to boost bank lending
(about 2 hours later)
  
The Bank of England will launch two new stimulus packages in response to the worsening economic outlook, governor Sir Mervyn King has said.The Bank of England will launch two new stimulus packages in response to the worsening economic outlook, governor Sir Mervyn King has said.
Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies.Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies.
Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence".Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence".
But Labour's shadow chancellor Ed Balls said the plans did "not go far enough".But Labour's shadow chancellor Ed Balls said the plans did "not go far enough".
In his annual Mansion House speech, Chancellor George Osborne said the stimulus packages would "support the flow of credit to where it is needed in the real economy".In his annual Mansion House speech, Chancellor George Osborne said the stimulus packages would "support the flow of credit to where it is needed in the real economy".
"We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he said."We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he said.
'Ugly picture''Ugly picture'
Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen.Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen.
The crisis had also created a "large black cloud of uncertainty" over the global economy, meaning companies and households were cutting back on spending.The crisis had also created a "large black cloud of uncertainty" over the global economy, meaning companies and households were cutting back on spending.
Signs of a slowdown in China, India and other "previously buoyant emerging economies" added to the "ugly picture" and meant further action was needed, the governor said.Signs of a slowdown in China, India and other "previously buoyant emerging economies" added to the "ugly picture" and meant further action was needed, the governor said.
The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets.The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets.
However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE.However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE.
Cheap loansCheap loans
Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending.Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending.
"Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said."Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said.
"The Bank and the Treasury are working together on a 'funding for lending' scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty.""The Bank and the Treasury are working together on a 'funding for lending' scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty."
But Mr Balls said the funding for lending scheme was "a significant admission that the government's existing policies have failed".But Mr Balls said the funding for lending scheme was "a significant admission that the government's existing policies have failed".
"Businesses will be desperately hoping it is more successful than George Osborne's Project Merlin and credit easing schemes which have actually seen net lending to businesses fall," he said."Businesses will be desperately hoping it is more successful than George Osborne's Project Merlin and credit easing schemes which have actually seen net lending to businesses fall," he said.
Peter Hann, banking expert at the Cass Business School, said the measures should have been implemented shortly after the banking crash of 2008, adding that "right now, in a time of weakening confidence, changing confidence is not going to happen just by easing money".
The BBC's business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%.The BBC's business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%.
The governor said he hoped the scheme would be in place "within weeks".The governor said he hoped the scheme would be in place "within weeks".
Banking sector liquidityBanking sector liquidity
The second measure he said the Bank would be introducing was a scheme outlined in December last year - called the Extended Collateral Term Repo Facility - to address a shortage of liquidity in the banking sector.The second measure he said the Bank would be introducing was a scheme outlined in December last year - called the Extended Collateral Term Repo Facility - to address a shortage of liquidity in the banking sector.
This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash.This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash.
Further details of the short-term liquidity scheme would be announced on Friday, he said.Further details of the short-term liquidity scheme would be announced on Friday, he said.
"I want to make it clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead.""I want to make it clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead."
Conservative MP Andrew Tyrie, chairman of the Commons Treasury Select Committee, said the plans looked encouraging: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks."Conservative MP Andrew Tyrie, chairman of the Commons Treasury Select Committee, said the plans looked encouraging: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks."
Spain is the latest country to be dragged into the debt crisis, with Madrid agreeing a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.Spain is the latest country to be dragged into the debt crisis, with Madrid agreeing a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.
Spain's borrowing costs on the secondary market - an indication of investor confidence in its ability to repay its debts - also hit 7% on Thursday, a level widely seen as unsustainable. Italy's borrowing costs also rose sharply.Spain's borrowing costs on the secondary market - an indication of investor confidence in its ability to repay its debts - also hit 7% on Thursday, a level widely seen as unsustainable. Italy's borrowing costs also rose sharply.
With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector.With Greek elections taking place this weekend in what is being seen as a referendum on the euro, analysts have warned of potential further shocks to the financial sector.