By Simon Miller
The Bank of England (BoE) has admitted that its Funding for Lending scheme (FLS) may be used to boost profits and capital rather than filter down to borrowers.
In its August Inflation Report, the BoE said the exact impact of the FLS would be "difficult to quantify" but was aimed at limiting further rises in the cost of new bank lending that should help to stimulate more borrowing.
"The timing and extent of pass-through to lending rates is uncertain," the report said. "For example, it is possible that some banks raising funding through the scheme will take the opportunity to boost profits and capital rather than lowering lending rates, although healthier capital positions would still yield a longer-term benefit."
The report said that the FLS could lower bank costs by as much as 200 basis points and that without the FLS, the BoE thought UK bank lending was more likely to decline than increase over the coming 19 months.
It added: "The FLS will help to prevent that outcome,. But the extent to which the scheme boosts new lending will also depend on other factors, including how much households and companies want to borrow at the available terms and conditions."
Speaking at the report's press conference, BoE governor Mervyn King said that the scheme was designed to incentivise banks to lend more through lower costs.
"If [the banks] want cheap trading from us then they will have to lend more," the governor added.