Bank shares jump to Bank of England stimulus packages

15^th June 2012

Emily Eastman

Emily Eastman

15 June 2012

Thursday saw the announcement of the Bank of England’s initiative to provide stimulus packages to UK banks, a measure taken to stimulate floundering economies.

The Bank of England has partnered with the government to provide billions of pounds worth of cheap credit to banks to lend to companies, with the aim of reinvigorating the economy in the face of the Eurozone crisis. The theory behind a stimulus package is that it can lessen the impact of a recession with increased government spending, although critics have voiced concerns that banks may hoard the credit and remain reluctant to lend.

Chancellor George Osborne maintained that the packages will “support the flow of credit to where it is needed in the real economy” in his annual Mansion House address, which followed his earlier comments that Britain’s prospects for economic recovery are being “killed off” by the Eurozone crisis. Osborne implied that any proposed solution would not be enough to end the financial turmoil, but that measures were being taken to end the threat to the UK economy.

These measures appear to arrive in the form of stimulus packages, with the additional liquidity sending bank shares soaring this morning. Shares in the Royal Bank of Scotland are up 7.13%, and similar rises can be seen across the larger UK banks. The wider FTSE 100 was up 0.8% at 5,510 points.

Also speaking at Mansion House last night, the Bank of England’s Governor Sir Mervyn King said that the Eurozone’s financial troubles were leading to a crisis of confidence in Britain. “The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead.”

The speeches and stimulus package action come before this weekend’s Greek elections, which could determine the fate of the Eurozone, and precede global talks on how best to tackle the currency crisis and spur the global economy.

King said that now was the right time to activate the stimulus packages, as the Eurozone debt crisis had raised funding costs in the banking sector, resulting in the cost of borrowing for businesses and individuals rising. As such, the cheap credit is being made available on the condition that banks increase their lending to companies and households, which in turn will encourage spending and improve the economic flow.

As seen in the already rising shares, let’s hope that these measures of support continue to improve our economic outlook, both in Britain and in the global market.

Emily Eastman