A lobby group has recommended tough measures to get banks lending more to small firms, rather than “hoarding cash” as they seek to reduce their exposure to bad debt.
The British Chambers of Commerce (BCC) urged the Bank of England's Monetary Policy Committee (MPC) to consider slashing the interest rate paid on the banks' deposits, to encourage them to lend more to credit-starved businesses.
Although several of the major high street banks announced a return to profit last month, Bank of Engalnd data released last week revealed that lending to business fell by a record £8.4bn in July.
David Kern, chief economist at the BCC, commented: “Persistent weakness in lending to businesses, particularly to small firms, poses serious risks to the early signs of economic recovery.
“As a temporary measure, the MPC should consider cutting the interest rate paid on deposits kept by commercial banks at the Bank of England, and in some circumstances make this rate negative. This might discourage hoarding of cash and encourage the banks to lend more.”
Kern’s call came as the MPC announced its decision to keep the interest rate on borrowing at 0.5% this month.
The MPC also voted to keep its programme of ‘quantitative easing’ (effectively printing money to buy corporate and government bonds) at its current level, after increasing it to £175bn last month.
The BCC wants to see the programme extended even further, Kern added.
He said: “Positive signs of recovery cannot obscure the risks of a relapse. The economy is still very fragile and the productive sector is vulnerable.
“We urge the MPC to raise the quantitative easing programme to £200bn and to purchase more company debt.”
© Crimson Business Ltd. 2009
