15th June 2012

Together with the Treasury, the Bank of England announced it will provide billions of pounds of cheap credit to banks to lend to households and businesses. Furthermore, banks will be given the ability to tap into a short-term liquidity scheme which will make it easier and cheaper for banks to borrow to cover any shortfalls in cash.

In his annual Mansion House speech, Chancellor George Osborne said the series of measures 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.

Meanwhile, Sir Mervyn King, who was also speaking at the Mansion House said: "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."

"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."

Ed Balls, Labour's Shadow chancellor says the two new stimulus packages "do not go far enough", claiming that the plans would not provide an adequate kick start to achieve an economic recovery.

"The Governor is now recognising what the Chancellor still refuses to – that urgent action to stimulate the British economy is needed now that we are in a double-dip recession."

"The Bank of England's new funding for lending scheme is 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."

Will the stimulus work?

BBC's Robert Peston says senior bankers that he's talked to give two reasons for their doubts about how far the schemes will revive the UK's lifeless economy.

"First, they say creditworthy businesses and households are reluctant to increase their debts in these uncertain times. Second, many of the companies and individuals desperate to borrow are those in some financial difficulties, so the banks don't actually want to lend to them."

Peston goes on to say that the nub of the story is that both the Treasury and Bank of England want the risks of lending to stay with the banks; "but if that remains the case, the new credit almost certainly won't get to those who most need it."

"The big outstanding question for the Treasury, therefore, is whether it is prepared to expose taxpayers to the probability that some businesses and households, who may deserve to be kept afloat, would not be able to repay all of what they owe."

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