The UK economy is struggling. GDP fell 0.7% in the three months to June, marking the third consecutive quarter of decline, and further prolonging the country’s double-dip recession. Output has now fallen in five of the last seven quarters, and is some 4.5% below its pre-recession peak. UK economic malaise is widespread, but a key area of weakness is household consumption, which has experienced a double-dip of its own.

At this morning’s meeting, the Bank of England’s Monetary Policy Committee voted to keep both interest rates, and the amount of QE, on hold. They are perhaps waiting to assess the impact of the Funding for Lending Scheme, launched yesterday. The principal aim of the scheme is to cut significantly the amount banks pay to borrow money, in the hope that this will encourage them to lend more. But with households striving to deleverage, and with banks sitting on sizeable paper losses, particularly on their mortgage books, is this really the right course of action?

Net new lending to households has all but dried up

Corporates are awash with cash, so the FLS will not benefit them. It may raise secured lending to households.

But households are only just starting to deleverage. Enticing them to give in and borrow more against an asset that remains substantially overvalued makes no sense at all.

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