Economy 'in jeopardy' if more is not done to ease lending, says Treasury Committee

28 January 2009 / by Rachael Stiles
The economy will be put in 'jeopardy' if more is not done by the Government to ease lending, the Treasury Committee has warned.

In a report released today the Treasury Committee has said that the bail-out scheme isn't working and is calling on the Government to do more to improve the flow of credit.

Commenting on Alistair Darling's pre-Budget Report, the committee described boosting lending as "the single most critical problem for the economy is the near term."

While Gordon Brown has been urging the banks to lend and reflect recent falls in the base rate in their mortgage range, even threatening them with legislation that will force them to do so, they are still reluctant to lend to each other or the consumer in the current climate.

"The Government must ensure the availability of credit increases quickly, and there is still far more work to be done." said Committee chairman John McFall. We will continue to use the Banking Crisis inquiry to demonstrate the continuing need for further action on this front."

In light of the high importance of getting credit flowing again, the Committee's report recommends that the Lending Panel, or other suitable agency within the Treasury, monitor the banks' lending closely and provide regular reports on their progress.

The Committee recognises that the lending levels have not risen markedly, - despite numerous cuts in the base rate, now standing at 1.5 per cent, and two attempts by the Government to bail out the banks – and warns that there must be an alternative plan because this is not having the desired effect.

Commenting on the ineffectiveness of the Treasury and Bank of England's actions to date, Mr McFall said: "Interest rates have fallen considerably. Soon they may be unable to fall further. We need to make sure we are prepared for the worst case scenario and make it clear to the public and businesses that the authorities will take firm action."

But while lower interest rates have helped borrowers to some extent, especially those on tracker mortgages who have seen their repayments plummet in recent months, the Treasury Committee is also mindful of the effects that falling interest rates are having on savers, who are watching as their investment lose value.

The Treasury should "consider measures that will also support savers at this difficult time." the report urges.

"What sort of message would it send out if we neglect those who have been diligently saving?" said Mr McFall. "It is crucial that amid the raft of other measures to get lending going, they are not punished for such diligence. We hope to see the 2009 Budget provide greater support to savers."

As interest rates have dropped consecutively for the last four months, banks have been agonising over how to lower their mortgage rates

while still remaining competitive in the savings account arena.

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