Experts worry funding is not raising lending

Tim Wallace
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BANK lending to businesses and households edged up in July, raising hopes that the flow of credit is at last improving on the back of initiatives like the Funding for Lending Scheme (FLS).

However, analysts have warned that the FLS’s impact is negligible so far.

“The scheme has succeeded only in ensuring credit flows tread water at a negligible level and it is difficult to discern yet any effect from the heavy bias under the redesigned scheme towards corporate lending,” said Barclays economist Simon Hayes.

And although the lending to households and firms increased £1.3bn in July, small firms saw a fall in loans.

“The tweaks to the FLS earlier this year which improved the incentives for banks to lend to SMEs seem to have been pretty ineffective so far,” said Capital Economics’ Jonathan Loynes.

The Bank of England has defended the scheme on the basis that credit conditions would have been even worse without it. It launched FLS at a time when it forecast strong falls in lending, and so believes the cheap money helped prop up credit supply.

And since the FLS’ introduction last year, interest rates on business and mortgage loans have plunged by around one percentage point.