Away from the eurozone debt issue, we have had the story surrounding Project Merlin's lending targets story this week and the subsequent British Bankers Association statement. Why is it important that UK banks get back to lending?
Liquidity is essential to a healthy economy, this is why economies such as the UK, US and Japan have been pumping money into their economies through quantitative easing – it stimulates growth. This is exactly why under Project Merlin, the largest UK retail banks were set lending targets by the government. Borrowing rates on UK loans have surged to a ten year high, which has really deterred borrowers’ appetite.
Whilst reduced borrowing does suggest businesses and consumers are trying to address their balance sheets, it does not do the UK’s growth prospects much good. With people saving rather than spending, UK retail sales are doing awfully. Commercial debt can be very positive for an economy, encouraging innovation and ambition, but most businesses are understandably more concerned with staying afloat and consolidating.
If businesses remain conservative, and reluctant to borrow, then economic growth will be capped. Poor growth means a weaker pound, because as long as the UK recovery remains vulnerable to a double dip recession, sterling will be out of favour. Stronger growth means the Bank of England can raise interest rates from their record lows, giving investors a higher-yield to chase.
Richard Driver
Analyst – Caxton FX
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