Frustration is growing at the highest levels of the Treasury over the Bank of England’s failure to take swifter and more determined action to boost flows of lending to cash-strapped businesses across Britain.

Treasury ministers and officials, including the Chancellor, are said to be increasingly exasperated over the Bank’s tardiness in taking more urgent steps to ease credit conditions for business, especially for small firms and medium-sized companies.

The latest symptom of escalating tensions between the Treasury and the Bank comes after Mervyn King, the Bank’s Governor, put himself sharply at odds with the Government last week. Mr King openly challenged key aspects of the Chancellor’s approach to overhauling financial regulation as both men spoke at the City’s Mansion House dinner.

In a fresh clash, Government insiders told The Times that Treasury ministers were irritated and perplexed over the slow pace of the Bank’s efforts to ease the severe financial stresses on businesses.

In a letter as long ago as March, the Chancellor urged Mr King to use the Bank’s huge £125 billion purchases of government and commercial debts under its radical “quantitative easing” scheme to ease financial conditions for companies.

Yet Whitehall insiders complained to The Times that: “We are three months down the line and they [the Bank] are still consulting.”

In the March letter, Mr Darling told the Governor that the Bank should carry out its asset purchases in a way that “would be most likely to restore the flow of finance to corporate borrowers”. Yet government sources note that Mr King argued at Mansion House that boosting bank lending was not a chief aim of quantitive easing.

Only this month the Bank began a two-week consultation, just ended, on plans to use more of its spending under quantitive easing to bolster corporate credit. The Bank said that it would consider a new facility to buy more short-term corporate debt but has yet to say whether it will go ahead. Mr King is expected to be pressed on the critical issue by MPs today, when he gives evidence to the Commons Treasury Committee and may signal imminent action.

Spencer Dale, the Bank’s chief economist, said yesterday that it was continuing “to review actively the case for extending its operations into other corporate credit markets”. Pressure on the Governor to act now will be heightened by the Treasury’s frustration, as well as new data showing that bank lending to companies remains extremely constricted. Net borrowing from banks by non-financial companies in May edged up by a meagre £100 million, after falling by £2.3 billion in April, the British Bankers’ Association said. The figures confirmed that the banks were continuing to screw down corporate lending. Mr Dale defended the quantitive easing scheme to pump extra funds into the economy, arguing that it was still too early to judge the impact. Early indications were positive: “It is still early days . . . but initial indications remain encouraging,” he said.

Confronting criticism that quantitive easing’s effectiveness was being undermined as foreign holders of government bonds take up much of the funds from the scheme, diverting these abroad, he said that the effects were still beneficial. “It does not mean the asset purchases will not have any economic benefit,” he said. “Rather, more of the effect will come through a lower exchange rate.”

He also brushed off claims that questions over quantitive easing were also raised by recent sharp increases in market interest rates, in the form of gilt yields, which the strategy was partly designed to hold down. He said that gilt yields remained lower than they would have been otherwise.

Home loans hope

• More signs emerged of a revival in the housing market as the number of home loans agreed by banks rose to the highest in a year: 31,000 mortgages for homebuyers were allocated last month, up from 29,000 in April and up by 74 per cent since a low hit last November. In a further optimistic sign, the average value of new home loans also rose for a fifth month in a row.

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