United Kingdom Flat Growth and The Lending Scheme

Looking at the quarterly inflation report of the Bank of England(BoE) gives indication how dip the euro crisis and lack of willingness of banks to lend money is affecting the economy at large. The BoE in its report reduced the expected growth rate from 0.8% to 0% compared to what it was in the same period a year ago of 2%.

The reasons for this forecast of the growth forecast are obvious to all and sundry which are; the euro crisis , the weather which , the bank holidays as well as government cut in spending.

The Lending Scheme

The new £80bn lending scheme which officially started on 1st of August for drawings is to allow banks and building societies borrow money at a reduced cost from BoE and eventually lend to households and the businesses with the hope that it will stimulate the economy activities in the UK. Banks and building societies will have access to it for a period 18 months and there is no limit on what individual banks can borrow from the scheme but will be able to borrow up to 5% of  their previous lending to the real sector as at the end of June 2012.

The banks are to lend to the real sector of the economy but the concern here is that banks  might take the loan to boost their profit and balance sheet position rather than lending to the businesses that are struggling with funding. On the building societies perspective, instead of allowing the building societies to decide who to give these funds to, I think BoE should have attached some conditions to it by designating some aspect of the loan to first time home buyers who might not have large initial deposits to finance their mortgages.