George Osborne will announce an expansion of the Bank of England's £80bn funding for lending scheme (FLS) ahead of a visit to Britain by the International Monetary Fund next month, as he seeks to head off calls for a softening of government austerity plans.
High-street banks are to be given added incentives to extend credit to small and medium-sized businesses in an expansion to the scheme, due in the next fortnight.
An IMF mission arrives in London for two weeks of talks on 8 May and Osborne plans to launch the beefed-up FLS in an attempt to persuade the fund that the coalition can boost growth without doing a U-turn on its deficit-reduction strategy.
Discussions between the Treasury and the Bank have concluded that high-street lenders need further inducement to pass on the benefits of subsidised lending to companies.
The FLS was launched last August and offered subsidised credit to high street banks, provided they passed on the benefits to households and businesses.
Figures so far have shown a pick-up in lending for mortgages but no increase in business lending. The Bank always envisaged that it would take time for loans to SMEs to increase, but minutes of the April meeting of its nine-strong monetary policy committee, released last week, signalled support for an expansion of the scheme.
With the business secretary, Vince Cable also pressing for action to help SMEs, Osborne has been keen for the Bank to increase the generosity of the FLS, but the need to target help to the corporate sector has been given added urgency by the imminent arrival of the IMF for its annual article IV consultation.
Last week, the IMF embarrassed the chancellor by urging a rethink of a tax and spending policy that will involve cutting Britain's structural budget deficit by 1% of national output this year.
The fund has told the chancellor that it is worried about the weakness of demand in the UK and will be asking whether he has any alternatives to changes his budgetary stance.
The chancellor was stung by last week's criticism from the fund. He argued that he had already taken steps in the budget to boost growth.
He pointed out to Christine Lagarde, the fund's managing director, during talks in Washington last week that the government had already adopted a flexible approach to austerity by pushing back the timetable by two years for debt to peak as a share of national output.
But the IMF is convinced that the UK is still operating well below its full potential. It is keen to discover in its talks next month why the economy has failed to respond to four years of unprecedented monetary stimulus.
During this time bank rates have been pegged at 0.5% and the Bank has created £375bn of electronic money through its quantitative easing programme.
The fund believes that its rich-country members have generally been over-hasty in their aggressive approach to deficit reduction, and that less of the fiscal pain should have been front-loaded.
On Saturday, a communique released at the end of a meeting of the IMF's policymaking committee said that where country circumstances allowed, governments should avoid responding to weak growth with fresh attempts to cut deficits, focus on the underlying health of public finances once the effects of the ups and downs of the economic cycle were taken into account, and allow borrowing to rise if activity was depressed.
It added that monetary policy alone was not sufficient to produce a lasting global recovery, noting that a credible medium-term plan to improve the state of public finances together with structural reform were needed.
"Eventual exit from monetary expansion will need to be carefully managed and clearly communicated", it said, reflecting widespread concerns in Washington last week that central banks faced a tricky task when the time came to raise interest rates and to sell the government bonds purchased under QE programmes.
guardian.co.uk
High-street banks are to be given added incentives to extend credit to small and medium-sized businesses in an expansion to the scheme, due in the next fortnight.
An IMF mission arrives in London for two weeks of talks on 8 May and Osborne plans to launch the beefed-up FLS in an attempt to persuade the fund that the coalition can boost growth without doing a U-turn on its deficit-reduction strategy.
Discussions between the Treasury and the Bank have concluded that high-street lenders need further inducement to pass on the benefits of subsidised lending to companies.
The FLS was launched last August and offered subsidised credit to high street banks, provided they passed on the benefits to households and businesses.
Figures so far have shown a pick-up in lending for mortgages but no increase in business lending. The Bank always envisaged that it would take time for loans to SMEs to increase, but minutes of the April meeting of its nine-strong monetary policy committee, released last week, signalled support for an expansion of the scheme.
With the business secretary, Vince Cable also pressing for action to help SMEs, Osborne has been keen for the Bank to increase the generosity of the FLS, but the need to target help to the corporate sector has been given added urgency by the imminent arrival of the IMF for its annual article IV consultation.
Last week, the IMF embarrassed the chancellor by urging a rethink of a tax and spending policy that will involve cutting Britain's structural budget deficit by 1% of national output this year.
The fund has told the chancellor that it is worried about the weakness of demand in the UK and will be asking whether he has any alternatives to changes his budgetary stance.
The chancellor was stung by last week's criticism from the fund. He argued that he had already taken steps in the budget to boost growth.
He pointed out to Christine Lagarde, the fund's managing director, during talks in Washington last week that the government had already adopted a flexible approach to austerity by pushing back the timetable by two years for debt to peak as a share of national output.
But the IMF is convinced that the UK is still operating well below its full potential. It is keen to discover in its talks next month why the economy has failed to respond to four years of unprecedented monetary stimulus.
During this time bank rates have been pegged at 0.5% and the Bank has created £375bn of electronic money through its quantitative easing programme.
The fund believes that its rich-country members have generally been over-hasty in their aggressive approach to deficit reduction, and that less of the fiscal pain should have been front-loaded.
On Saturday, a communique released at the end of a meeting of the IMF's policymaking committee said that where country circumstances allowed, governments should avoid responding to weak growth with fresh attempts to cut deficits, focus on the underlying health of public finances once the effects of the ups and downs of the economic cycle were taken into account, and allow borrowing to rise if activity was depressed.
It added that monetary policy alone was not sufficient to produce a lasting global recovery, noting that a credible medium-term plan to improve the state of public finances together with structural reform were needed.
"Eventual exit from monetary expansion will need to be carefully managed and clearly communicated", it said, reflecting widespread concerns in Washington last week that central banks faced a tricky task when the time came to raise interest rates and to sell the government bonds purchased under QE programmes.
guardian.co.uk
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