In its Inflation Report, published on Wednesday 13th February, the BoE suggested that lenders need to approve more mortgages and cut interest rates further to match the reduction in their own cost of funding, as per the Government’s Funding for Lending Scheme.

The Report outlined growing evidence that Funding for Lending had improved private sector credit conditions, but showed it was still too early to tell how far it would increase net lending to the real economy, which remains flat.

It stated: “Interest rates on many secured and unsecured loans have continued to fall. For example, average quoted fixed-rate mortgage rates have fallen by between around 65 and 95 basis points (0.65% and 0.95%) since the end of June.

“But some of the falls have been smaller than the corresponding declines in bank funding costs, particularly for floating mortgage rates, which are only a little lower.”

Mortgage approvals have picked up, but remain well below pre-recession levels, it noted, and housing market activity remained subdued: “Further rises in mortgage approvals are expected over the coming months and would be in line with the expectation that lower bank funding costs and incentives provided by the FLS will generate stronger net lending in 2013, following several years of stagnation.”

In his foreword to the report, BoE governor Mervyn King said there was cause for optimism and an economic recovery was in sight.

“Growth is likely to be weak in the near term. But further out, a continued easing in domestic credit conditions – supported by the Bank’s asset purchase programme and the Funding for Lending Scheme – together with a stronger global backdrop, underpin a slow recovery in output.”

He acknowledged inflation remained “stubbornly high”, at 2.7% in January.