Well done Mr. Carney for focussing Funding for Lending on business loans – which is what it should always have done



At long last some relief in sight for savers?


by Dr. Ros Altmann

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The Bank of England’s announcement today that the Funding for Lending scheme will only be available for business lending, not mortgage lending, is fantastic news. At long last, there seems to be a recognition that there are real dangers of a housing bubble based on unsustainably cheap mortgages and that the real problem in bank lending has been for small firms.

SMEs have been starved of loans for the past few years, while banks have refused to lend to them on reasonable terms, even after Funding for Lending started. Banks have failed to offer reasonable terms to small firms, often imposing high fees or draconian collateral requirements that have made it impossible for these businesses to borrow the money they needed.

Bank of England figures show clearly that banks have not been playing their part in lending to support growth for smaller enterprises and far too much of the increase in lending has been based on mortgage loans. This has caused distortions in the housing market, has pushed up rents and runs the risk of a painful period ahead when interest rates normalise.

Savers have also suffered as a result of the banks’ focus on using funds from FLS to drive mortgage lending. In effect, banks no longer needed savers money and could fund mortgages without having to pay for savers’ deposits. From next year, however, mortgage business will require other sources of funding, so perhaps banks will start offering savers better deals. It is too soon to pop the champagne corks just yet, but hopefully there will be much better news in 2014.

There was a dramatic drop in savings rates straight after FLS began and a return to higher saving rates is long overdue. Interest rates are still lower than inflation for most savers and as the economy is growing strongly now, a rate rise is likely sooner or later.

Well done Mr. Carney for finally focussing Funding for Lending on business loans, which is what is should always have done.


ENDS
Dr. Ros Altmann
28 November 2013


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