The Bank and England and UK Government have announced plans to pump more money into small businesses.
A flagship scheme designed to boost mortgage and business lending will no longer apply to households as a surging property market means it is no longer needed, Bank governor Mark Carney said yesterday.
The Funding for Lending scheme, which offers cheap finance to banks and building societies to encourage loans, will instead be refocused on stimulating borrowing for small businesses, where it remains muted.
Mr Carney said it was appropriate to take measures now to ensure the “evolution” of the housing market is as “constructive” as possible.
He said: “Over the past year the Funding for Lending Scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households.
“The changes announced today refocus the Funding for Lending scheme where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”
Chancellor George Osborne said now was the right time to turn the scheme’s firepower on small businesses.
He said: “Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focusing the Funding for Lending Scheme to support them”.
The scheme was launched in June last year by the Treasury and the Bank of England and has already been revamped once this year to try to help small and medium enterprises (SMEs) – a sector seen as key to recovery.
The extension of the scheme increased the incentives that applied to SME loans by multiplying the amount of cheap finance lenders could access in return. Now, lower fees will also apply to these.
FLS will no longer apply to household loans from January though lenders will still be able to draw down finance they have qualified for, until the end of the month.
The changes mean the Bank is no longer providing any stimulus measures for household mortgages.
But they do not affect the Treasury’s Help to Buy scheme, which assists those struggling to build up deposits to buy a home to access loans worth up to 95% of a property’s value.
The Bank announced the changes to FLS in its twice-yearly Financial Stability Report, which noted that house prices had gathered momentum, with surveys showing average prices rose 6.8% in the year to October.
The report said that while the market was picking up from a low level, house price inflation was already “above historical average” on some measures.
The Bank’s Financial Policy Committee is also creating a new power to be able to vary the affordability criteria that borrowers must meet – to ensure that they can afford to service mortgages if interest rates rise.
Mr Carney said: “The package of measures I have described is a coherent, proportionate response to the evolving risks in the housing market.”