MPC's Broadbent: Euro crisis threatens business lending

Speaking to the Evening Standard, monetary policy committee member Ben Broadbent welcomed the government's bid to help out smaller firms by lowering credit costs but said the initiative was vulnerable to the nightmare scenarios which could play out in Europe.

Credit easing was the central plank of the Chancellor's autumn statement, with a loan guarantee scheme open to small firms with revenues of less than £50 million aimed at lowering their borrowing costs by one percentage point to help get the economy moving.

Broadbent, pictured, said: "It's true that broadly there are many areas of the economy still constrained by lack of credit supply... and that by and large the banks have been under pressure themselves. If by allowing them to fund some of that lending more cheaply you can encourage the banks to increase the supply of that credit then that is a good thing."

But he added: "How material that is in size in terms of economic growth is harder to judge . Directionally it seems reasonable to expect it to have some impact, but it is not clear how much, or whether it would be sufficient, for example, to offset the realisation of some of the worst risks of the eurozone."

Broadbent, a former senior Goldman Sachs economist whom most of the City had pencilled in as a policy hawk when he joined the MPC in June, voted for more money printing in October and also warned of rising double-dip risks. He said: "Clearly things have slowed a lot since earlier this year and there is a material chance of a technical recession."

He is also worried over a credit crunch among European banks brewing at the worst possible time for the real economy when the continent's financial institutions are being urged to increase their strength.

Broadbent added: "Having too low a capital buffer makes the banking system more vulnerable to hits to its balance sheet... but on the other hand adding to capital probably has negative effects on the supply of credit, when done very quickly."

But he struck a positive note for UK households next year as inflation pressures ease. He added: "We would be wrong to paint only a gloomy picture. We have had a couple of really big hits to household income over the last two years... Between them VAT and commodity prices might have taken 2.5% out of household incomes, and we're not going to have those again.

"VAT is not going up again and petrol and oil prices look pretty stable. That's a big effect which will add to real household income."

Europe's economic engine Germany is set to escape recession after a surprise rise in business confidence in December, the Munich-based Ifo Institute said today. Its business climate index saw the biggest rise in sentiment since February as firms reported improving prospects outside the eurozone and signs of improvement among manufacturers and services sectors.