UK to get credit flowing, fight euro zone decline
LONDON (Reuters) - Britain will launch a new scheme to get credit flowing in the ailing economy and the Bank of England will activate its emergency liquidity tool as the euro zone crisis casts a "black cloud" over the economy, the Bank Governor Mervyn King said on Thursday.
The case for another round of gilt purchases had also grown as the outlook for the economy had worsened, King said in his annual Mansion House policy speech to London financiers, though he again rejected calls for the central bank to buy private sector assets, such as company loans, directly.
King said the Bank in conjunction with the finance ministry will in the next few weeks launch a scheme to offer banks loans with a maturity of possibly 3-4 years at below current market rates.
The loans would be made available on condition that banks increase their lending to businesses and households. King said the government's approval was needed because of the long-term nature of the lending and its pricing.
In addition, the central bank will activate its Extended Collateral Term Repo facility, created in December, to provide six-month liquidity against a wide range of collateral.
It will offer at least 5 billion pounds of loans per month via the operation.
"It is now time to activate that scheme, in the words of the Bank's Red Book, 'in response to actual or prospective market-wide stress of an exceptional nature' over the coming weeks," King said.
The Bank halted its quantitative easing asset-buying programme in May after buying 325 billion pounds of government bonds.
But the central bank has faced growing calls to do more to stimulate demand as Britain has slipped back into recession and dangers from the euro crisis mount. Chancellor George Osborne said monetary policy still had further to run.
King said the intensifying euro crisis was driving up funding costs for Britain's banks, making credit more expensive for firms and households.
"The other effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole," he said.
"The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead," he said, warning that this was leading to a self-reinforcing weaker picture for growth.
"With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing," King said.
Gilt purchases would still be effective and could be used in tandem with measures to ease conditions in the banking sector, King said.
The central bank governor also urged global regulators to relent on banks' liquidity requirements for now, arguing that central banks stood ready to provide ample liquidity to the banking system.
King's comments came after deputy governor Paul Tucker indicated that liquidity requirements on banks may be limit the impact of the central bank's quantitative easing programme.
(Reporting by Fiona Shaikh. Editing by Jeremy Gaunt.)
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