UK floods banking system with more than 100 billion pounds

LONDON: The government and central bank will flood Britain's banking
system with more than 100 billion pounds ($155.43 billion), seeking to
pump credit through an economy struggling to escape recession under the
"black cloud" of the euro zone crisis.
In his annual Mansion House policy speech to London financiers on Thursday, Bank of England Governor Mervyn King
said Britain would launch a scheme to provide cheap long-term funding
to banks to encourage them to lend to businesses and consumers.
He also said the bank would activate an emergency liquidity tool.
Treasury
officials said the government plan could support an estimated 80
billion pounds in new loans, while the central bank's separate scheme
will provide monthly 5 billion pound tranches of six-month liquidity to
banks.
King said the case for pumping more money into the
economy via further purchases of government bonds had increased as the
outlook for the economy had worsened, although he again rejected calls
for the central bank to buy private assets.
King said the euro
zone's woes were leading to a crisis of confidence in Britain which was
leading to a self-reinforcing weaker picture of growth.
"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.
Britain's action comes just before cliffhanger
Greek elections this weekend that could determine the fate of the euro
zone, as well as a meeting of the leaders of the world's major
economies next week to find ways to tackle the currency bloc's crisis
and spur the global economy.
British finance minister George Osborne
warned of the huge dangers from a collapse of the euro area. He again
urged euro zone leaders to fix the crisis and said Britain was taking
action to protect its own economy.
"We are not powerless in the
face of the euro zone debt storm," Osborne said in his speech at
Mansion House. "Together we can deploy new firepower to defend our
economy from the crisis on our doorstep."
Britain is still
reeling from the 2007-2009 financial crisis that has left many Britons
poorer and forced the country to bail out big banks with tens of
billions of pounds of taxpayers' money.
The government on
Thursday announced a sweeping reform of bank regulations aimed at
making financial institutions safer, and avoiding a re-run of the
crisis which has pushed Britain into recession twice in the last four
years.
CASH BOOST
Britain slid back into recession around
the turn of this year, piling pressure on Osborne's embattled
Conservative-led coalition government to come up with new ways to boost
growth.
The government has pinned its fortunes on a tough
austerity plan of tax hikes and spending cuts to erase a budget deficit
which still comes in at around 8 percent of GDP.
Osborne defended his debt-cutting measures, arguing that they gave the Bank of England the leeway to keep monetary policy loose, and said there was still more the central bank could do.
BoE
Governor Mervyn King said the central bank would complement its
quantitative easing asset purchase scheme with new steps to encourage
bank lending and reduce their funding costs, which have rocketed as a
result of the euro zone crisis.
The BoE and finance ministry
have designed a new scheme, to be launched in a few weeks, that would
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.
In
addition, the central bank will activate its Extended Collateral Term
Repo facility, created in December, to provide six-month liquidity to
banks against a wide range of collateral.
King said now was the right time to activate the scheme, which is aimed at helping banks through phases of exceptional stress.
King
hinted that the central bank may also restart its QE programme, which
it halted in May having bought 325 billion pounds of British government
bonds, and countered accusations that the scheme had lost its
effectiveness.
"With signs of a deterioration in the outlook,
especially in world markets, the case for a further monetary easing is
growing," King said. - Reuter