Economy to get boost from extra credit

The Bank of England. Photo: Reuters

Tomorrow the Treasury will formally open the 'funding for lending' scheme - the big bazooka joint effort from the Treasury and the Bank of England that will provide up to a £100 billion of extra credit to the economy to keep things moving. Although officials objected to this description, the scheme was designed a bit like a giant airbag to be inflated to protect our economy deteroriating further in the event of a Eurozone meltdown.

But as this mammoth scheme gets going, the much vaunted National Loan Guarantee Scheme, or 'credit easing' will be dwarfed. New figures released to ITV News say that credit easing has resulted in 16,000 loans and more than £2.5 billion of lending. It has been open since the end of March and was predicted to provide up to £20 billion over two years - the figures so far have not been insignificant.

Yet the new Funding for Lending scheme is much, much bigger. And it is much more appealing to the banks, with fewer bureaucratic hoops to jump through. Bank sources say they are much more likely to use this scheme and shun the loan guarantee scheme as time goes on.

Treasury sources acknowledge that under current circumstances banks are more likely to use Funding for Lending, the new scheme, than carry on with the loan guarantee scheme, despite the Chancellor talking it up for many months. But while they will acknowledge tomorrow that banks are likely to choose the bigger scheme they are adamant that the guarantee scheme will continue to exist.

But as the Federation for Small Business suggests tonight, the main task of any scheme is to 'ensure that the finance actually gets through'. Bank sources suggest the Loan Guarantee Scheme and Funding for Lending have already both resulted in cuts in the cost of lending. With businesses nervous about taking on additional debt in these uncertain times, the cost is only part of the equation.