THE jump in the value of bank shares yesterday in response to two new stimulus measures announced by Bank of England Governor Sir Mervyn King on Thursday night was a clear indication of investor relief at a policy designed to kickstart growth.
The new plan by the Bank and the Treasury to provide banks with funds at below-market rates as long as these are passed on as business loans at a reasonable rate of interest is belated recognition that small and medium-sized business are unable to secure the funding they need to expand despite good records of creditworthiness.
The UK's return to recession is the undeniable evidence that George Osborne's austerity plan has failed. Despite interest rates being at the historic low of 0.5%, the average rate charged to small businesses is 7% and some complain of having been offered only an unaffordable 20%. The "funding for lending" scheme, is therefore a welcome new tool to boost growth in the economy. That Sir Mervyn intends it to be up and running within a few weeks is a measure of weakness in the UK economy. Until now the Bank of England has stuck rigorously to quantitative easing to increase liquidity to avoid risk to the taxpayer by buying risky loans. The question now is whether the new measures, which also include providing short-term funds to the banks in emergencies, will be sufficient.
The danger is that the storm engulfing the eurozone causes business in the UK to batten down the hatches and postpone plans for expansion. Despite the widespread welcome for the new measures, optimism must be tempered by reality. The scale of the task was made dauntingly clear by yesterday's figures showing the trade deficit widened in April to £4.4 billion, the highest level for almost seven years, largely as a result of a 6.8% fall in exports to the EU. Much will depend on the outcome of the Greek election tomorrow but the European Central Bank is poised to provide further support to calm the markets.
Sir Mervyn King's new policy led to claims that he has pressed the panic button. The point of such a move is to activate the right kind of help. If the economy is to avoid further contraction, never mind achieve growth, the Bank's armoury must be backed by political action. Pressure must be put on the banks, especially those largely owned by the taxpayer, to ensure the new money goes out to create new jobs.
While the eurozone is beyond the control of the UK Government, the 13% reduction in construction output in April was due to a drop in Government projects, including housing and infrastructure. The remedy lies with the Treasury. George Osborne has been reluctant to adopt plan B for political reasons but with the damage from too deep an austerity programme growing, the time has come for plan C: the case for construction and capital projects.
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