15th June 2012 by Simon Ward
The suggestion here has been that the Bank of England should eschew more QE and instead offer ECB-style medium-term funding to banks at a low interest rate and against wide collateral, in order to reduce borrowing rates and credit rationing. In his Mansion House speech last night, however, the Bank’s Governor, Sir Mervyn King, signalled an extension of QE while announcing two liquidity provision measures that, while helpful, fall short of the ECB’s three-year longer-term refinancing operation (LTRO) initiative.
The most significant of the two measures is the launch of the “extended collateral term repo (ECTR) facility”, under which the Bank will lend at least £5 billion of six-month money each month against a wide range of collateral at a rate to be determined in an auction but subject to a low minimum of 25 basis points (bp) above Bank rate. The Bank previously stated that the ECTR, when activated, would lend for only one month and at a minimum bid rate of 125 bp over Bank rate.
The facility, however, compares unfavourably with the ECB’s three-year LTROs because 1) the amount lent is decided – and will presumably be limited – by the Bank rather than banks, 2) the six-month loan period is relatively short and does not address banks’ medium-term funding difficulties and 3) the lending rate is auction-determined rather than fixed.
The still-formative “funding for lending” initiative, meanwhile, seems designed to inject liquidity only to the extent that banks commit to advancing new loans, suggesting that it will take a long time to grow to the mooted £80 billion. It does not affect the cost of funding existing loan books so promises little if any interest rate relief for current borrowers.
The suspicion, therefore, is that take-up under the two facilities will be much smaller – relative to the size of the economy – than for the ECB’s two three-year LTROs. Such an outcome would suggest that Sir Mervyn, once again, has skillfully resisted political demands for the Bank to deploy the full weight of its balance sheet to improve private-sector credit supply.
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