Help at last for those that need credit? The UK government announced its Funding for Lending scheme this afternoon: an £80bn plan to encourage British banks to lend more to businesses and consumers, in exchange for cheaper funding themselves. (You can read the details of the scheme on The Telegraph.) Of course, what’s important for us is: How has the foreign exchange market reacted to the news, and how is it likely to act in future, as the scheme goes on?
Since being announced an hour or two ago, the pound has climbed above half a cent to 1.27 against the euro, and almost a full cent against the US dollar to 1.5550. In short, for the moment at least, the markets have given the scheme a stamp of approval: this seems a credible way to get Britain’s economy motoring again, without endangering the government’s deficit reduction program. In the words of George Osborne, it shows the UK is “not powerless to act” in the face of the Eurozone crisis.
Yet what will happen once the initial euphoria has worn off? Bank of England governor Mervyn King seems equivocal where this is concerned, stating that there’s “no guarantee” the scheme will lead to more lending, given that the problem is one of confidence. In addition, The Telegraph states that: “Like all such policy actions, it will be difficult to quantify the exact impact, because we cannot know what would have happened in its absence.” In other words, unless some way can be found to quantify its effects, it’s unlikely to be proven something that provides an obvious boost.
That means the pound may not gain from this in the medium term.