On Tuesday Paul Tucker from the MPC gave a speech about monetary policy in a rebalancing economy. A few remarks stand out
Rebalancing of the UK economy needs to happen…
… “the balance of aggregate demand needs, over the medium term, to shift away from household and public consumption towards net trade and investment”
But tight credit is causing problems …
“Rebalancing is already impeded by tight credit conditions…”
… and the instability in the Eurozone could make this worse
“With instability from the euro area crisis threatening the UK, our banks cannot avoid being exposed to outsized risks. That is reflected in elevated funding costs, which they pass on to customers to a greater or less extent”
“The gradual improvements in credit conditions seen until the summer, and documented in the Bank's quarterly Credit Conditions Survey have been arrested for now”
Tucker argues that continuing constraints in accessing finance will “impede the rebalancing of the economy's productive capacity” as credit can be a key part of firms' ability to invest, grow and enter new markets. This is particularly true for SMEs
Tucker states that loose monetary policy can help ease the costs for firms, but it is not the whole answer.
Ahead of the Autumn Statement on Tuesday we are calling on the government to do more to aid Access to Finance:
The government has already announced that it will look into credit easing, which is a welcome recognition of the problems on the supply side. However, the form that credit easing will take remains uncertain, including whether the proposals will have any impact in the near term.
This is why we are calling for the government to make the most of existing vehicles:
- One example would be the pre-existing £2.5bn Business Growth Fund. Government should use its existing relationship with the banks to encourage them to extend the scheme to cover debt as well as equity. Many smaller-business owners are reluctant to give up equity in their companies; a debt product could widen the pool of applicants to the fund. This reluctance on the part of SMEs could explain the low take-up of funding reported in today's FT.
- Another example would be extending Enterprise Investment Scheme eligibility to debt in line with the Business Angel Scheme, thereby increasing access to non-bank debt.
To improve the longer-term shape of finance and ensure banks are working for businesses, we are also looking for a positive response from the government on the Independent Commission on Banking's recommendations on competition.
For more information on our key priorities for growth, see our submission to the Chancellor ahead of the autumn statement.