Chancellor George Osborne has announced an £80bn emergency scheme to help get banks lending to businesses.
The scheme shows Britain is “not powerless to act” in the face of the crisis in the eurozone, Osborne claimed.
The Treasury and the Bank of England hope the “funding for lending” programme will help battle the tightening credit squeeze and aid Britain’s economic recovery.
Credit availability for both businesses and households is falling, according to the Bank, while borrowing costs are going up as eurozone problems weigh on the banking sector.
The scheme will offer banks cheap finance providing they pass it on to borrowers under the funding for lending scheme, which aims to unblock the flow of credit.
Osborne said: “Today’s announcement aims to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their home.”
The chancellor said the scheme would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm”.
British banks will be offered funding at low interest rates over a four-year period under the funding for lending scheme, but it will be linked to bank lending performance to persuade lenders to boost loan availability and cut rates.
Banks will be able to access an additional £1 of cheap funding from the scheme for every extra £1 of additional lending they make. Institutions that cut lending will need to pay higher rates to use the initiative.
The Bank hopes borrowing terms and rates will be eased by the competitive pressure and will encourage companies to borrow as a result.
It stressed the scheme was designed to support the economy and not the banking industry.
BusinessFunding.co.uk director Stephen Bence said: “Sadly, this appears to be yet another government scheme so far removed from the intended recipients – hard-pushed small and medium-sized businesses – that it’s unlikely to make any real impact.
“There doesn’t appear to be any guarantees of an increase in absolute lending or a lowering of business loan rates – it’s just another cheap source of finance for banks to profit from.
“If the government was really serious about helping businesses grow it should look to more direct action over employment regulations, red tape and employer national insurance”
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