Recent data implies that the BOE‘s Funding for Lending Scheme (FLS) still hasn’t had much effect on the economy. Would the recent figures released from the U.K. be a game-changer for the upcoming BOE rate decision?
In case you’ve forgotten, the FLS was launched last August 2012 as an alternative to increasing asset purchases.
The logic behind the program is simple. Basically, the BOE has reduced funding costs for banks, which should encourage them to lend more. How? The central bank issues loans to banks at a discounted rate which is determined by the amount of loans they give out to businesses and consumers.
The program sounds darn good, right? Unfortunately, data gathered by the BOE implies that it may only look good on paper.
For one, banks don’t seem to find enough incentive at borrowing from the BOE at lower rates. The amount of discounted loans issued by the central bank in the last quarter of 2012 was lower by 2.4 billion GBP at 9.5 billion GBP.
Lending to non-financial businesses also suffered in February. A recent BOE report showed loans issued by banks dropped by 2.2 billion GBP from January which is a lot weaker than the six month average of -1.5 billion GBP.
Mortgage approvals also saw a 51,653 monthly drop in February. The six-month average for loans to be used in house purchases is at 54,187. This, along with the worse-than-expected U.K. manufacturing PMI report resulted to the pound taking huge hits from its counterparts yesterday.
Given these data points, I can’t help but wonder if the seemingly absent effect of the FLS would be enough to convince the BOE’s Monetary Policy Committee (MPC) to step up its stimulus plans.
Recall that the MPC hawks barely outvoted the doves in the latest monetary policy announcements. One of the reasons why they held off from pulling the trigger on more stimulus was that it takes time for low funding costs to trickle to lending volumes.
I guess the question now is how much longer can the BOE play the waiting game? Have policymakers lowered lowered their expectations or are they just refusing to recognize that the FLS program has failed? Some analysts say that the problem isn’t the availability of cheap loans, rather, the demand for them. Businesses and consumers seem to be wary about borrowing.
Regardless, most market players are still expecting the BOE to keep its monetary policy steady this week although some say that the margin between the hawks and the doves could tighten. Make sure you don’t miss the MPC’s decision on Thursday at 12:00 pm GMT!