Osborne and King launch £100bn lending plan

The government and the Bank of England are to join together to unveil a package of stimulus measures designed to make it easier for households and businesses to borrow.

The move is designed to provide a buffer of support if the euro debt crisis escalates and wholesale bank funding becomes more difficult to access.

Since 2009, even though base rate has been at a record low of 0.5 per cent, the differential between base rate and the rate attached to mortgages and personal and business loans has been wide, and in recent months it appears to be growing, especially for households and smaller businesses, exactly the parts of the economy that require confidence to generate growth.

The £100 billion package was launched by the Chancellor, George Osborne at his Mansion House speech in the City of London last night. Mr Osborne launched his speech saying that now is the time to use the financial credibility he has been building up for the past two years.

Mr Osborne said: “We are not powerless in the face of the eurozone debt storm.”

Mr Osborne told his audience that he has been working closely with the Governor of the Bank of England, Sir Mervyn King to prepare new measures to protect the UK from further negative economic repercussions from events in the eurozone.

The scheme involves the Bank of England providing “funding for lending”, a scheme to reduce bank lending costs in return for a commitment to lend from the banks.

The Treasury claims this will combat the increasing cost of loans and mortgages and could facilitate an estimated £80 billion in new loans. The government will provide an indemnity to the Bank of England to run the scheme and lend to the banks against collateral.

The Bank of England will also today activate an emergency scheme, to run for a minimum of four months, that offers six-month liquidity to banks in tranches of at least £5 million. Sir Mervyn also pointed to a resumption of the policy of quantitative easing (QE), saying that “the case for a further monetary easing is growing.”

Mr Osborne brushed off calls for a “Plan B” from Labour and instead presented proposals aimed at getting the maximum out of the UK’s record on fiscal discipline and credibility with the markets to allow cheap wholesale borrowing.

The new proposals aim to ensure that the benefits that the UK financial markets have because of the government’s deficit reduction policies are passed onto households and businesses through cheaper borrowing.

The Chancellor said that the new scheme will become operational within weeks and will provide long-term funding for banks at below the rates available on the market. These advantages will only be available on condition that the banks “sustain or expand” their lending to the UK non-financial sector.

Sir Mervyn, said that the initiatives combine tight fiscal policy and active monetary policy and represent a change in his views. Previously, he has been against offering lower rates and funding costs to banks but has changed his mind because of the extraordinary economic conditions the UK is facing.

Shadow Chancellor, Ed Balls questioned the likely effectiveness of the new scheme, saying: "Simply giving the banks billions of pounds doesn't translate into loans to business."

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