The Chancellor, George Osborne, may be looking to extend the Funding for Lending Scheme (FLS), after pressure from the International Monetary Fund (IMF) over his austerity plans.
The existing FLS is due to come to an end at the start of 2014, however an announcement about the possible extension of the scheme is expected before the IMF are due to visit next month.
Since the FLS was introduced in August last year, many financial experts have questioned its effectiveness; research has suggested that banks have actually lent less money to borrowers in the second half of 2012, than they did in the six months leading up to the introduction of the FLS.
According to some economists, the possible extension of the scheme is a demonstration of the government’s desire to rebuild the UK’s economy, by using such initiatives as the FLS and the Help to Buy scheme, to help small businesses and homebuyers borrow much needed capital.
The IMF is due to arrive in the UK next month ahead of its annual consultation; the organisation has issued warnings ahead of their visit. Olivier Blanchard, Chief Economist of IMF, has said the UK was “playing with fire”, meanwhile Christine Lagarde, head of the IMF, has warned: “Now might be the time to consider adjusting the pace of the austerity programme.”
Economy shows little growth
Last weekend, Fitch became the second of the three major credit ratings agencies to relegate the UK’s credit rating to AA+, with Moody’s having already downgraded the UK at the end of February. There is also concern that Standard & Poors could also now consider downgrading the UK.
These downgrades make the UK part of the second tier of countries without the highest credit rating, for the first time since 1978.
On Thursday the Office for National Statistics (ONS) is due to release its first estimate for economic growth over the past three months.
Financial experts are split with some predicting very modest growth, whilst others believe the economy will have contracted further resulting in a triple dip recession.
Savers hit hard
Whilst the FLS scheme has reduced interest rates for mortgage and business borrowers alike, there is doubt whether it has made finance more available to those people previously unable to get credit.
It is now impossible for tax payers to save a lump sum and receive a rate of interest which beats inflation, reducing the buying power of savings year on year.
A further extension of the FLS will only make matters worse for savers, already struggling to cope with a perfect storm of a low Bank of England base rate, relatively high inflation and the FLS.