End of liquidity scheme won’t lead to mortgage rate hike, says lender

MERVYN KING, SCHEME IS GENEROUS
MERVYN KING, SCHEME IS GENEROUS

Fears that the Bank of England’s decision not to extend its Special Liquidity Scheme will lead to increased mortgage rates are un-founded, says Linda Will, sales and marketing director at In The Loop Mortgages.

Bank governor Mervyn King unveiled the Bank’s quarterly inflation report last week and ruled out extending the scheme, which is due to end in 2011.

The facility allows banks and building societies to swap mortgage-backed bonds and other unwanted assets for government bills.

But Will says banks will be only too pleased to move away from government support.

She says: “I don’t think the ending of the scheme will have a big effect on the way lenders price products. A lot of them have built up alternative funding models and will look at a variety of sources when the scheme ends.”

Will adds that government support for lenders generally comes at a high price, and lenders tend to regard government loans as a bridging facility because they are expensive and designed to give temporary help.

King says the scheme is one of the most generous in the world.

He says: “Banks in this country have been given three years’ fund-ing for the securities they lodge with us. No other country has got a scheme that lasts as long. This is more than enough.”

He adds that what is important now is that banks raise capi-tal to restore their balance sheets.

King says this can be done not only by issuing new capital, but also by ploughing back retained earnings rather than distributing them as bonuses.

The report warns that inflation is likely to exceed 3% in January but adds that it is expected to fall back again as the year progresses.

King has also hinted that further quantitative easing might be necessary, saying it is too soon to rule this out.

The Monetary Policy Committee voted to keep interest rates at 0.5% and bring quantitative easing to a halt at its February meeting.