The Bank's push to ease credit
The UK is depending, almost entirely, on monetary policy to pull the economy out of the doldrums. And right now, it doesn't seem to be enough.
You can expect Sir Mervyn King to admit this basic reality in his speech at the Mansion House later on Thursday. What will be most interesting to the financial markets will be what he and the chancellor plan to do about it.
Whatever you think about the government's fiscal policies, or the Bank of England's policy of quantitative easing, they have not produced much economic growth in the past two years. Indeed, the economy may still now be shrinking.
Perhaps economic stagnation (or worse) is an inevitable consequence of the 2008 financial crisis and - increasingly - events in the eurozone. It could be that the financial uncertainty created by the troubles of Greece and others is just too great for UK policymakers to offset.
Or perhaps, to produce growth, the government will, in the end, have to take another look at its budget deficit targets and reach for a bona fide Plan B.
But, before we get to any of that, the Bank and the Treasury are going to have one last go with the policy framework they already have.
That is the clear message I expect to hear from the governor of the Bank of England and the chancellor - quietly signalled in a speech earlier this week by deputy governor Paul Tucker.
What is most worrying the Bank, in the current climate, is the rise in the spread between the very low bank rate it has set to spur growth and the much higher interest rates that banks are charging to lend to companies and households.
In the wake of this kind of crisis, you would expect that gap to be wider than in normal times, but lately it has been not just large, but getting bigger - mortgage rates, for example, have been going up. This despite the fact that the economy has slipped back into recession.
In effect, that widening spread means that monetary conditions have tightened and lending across the economy has been flat, despite the Bank's efforts to keep policy as loose as possible.
There are two possible explanations for this tightening: lenders and borrowers are feeling exceptionally risk-averse, or regulators are forcing banks to be too cautious in building up capital and liquidity for a rainy day.
Probably, the explanation is a mixture of both. But Mr Tucker signalled clearly in his speech that the Bank (presumably in conjunction with the Treasury) wanted to do more to ease credit, and certainly wanted to make sure that regulator pressure wasn't forcing banks to be too conservative.
Here's the key sentence on credit: "Given the costs to our economy, the authorities, including the Bank, need to consider what more we could do to alleviate tight credit conditions in the UK."
What form would this easing take? We will hear more on that from the governor later on Thursday. But Mr Tucker did draw a clear distinction in his speech between bank capital and bank liquidity.
Banks have been battening down the hatches when it comes to capital, Mr Tucker noted, partly because UK regulators had urged them to, but also because the eurozone crisis had made the world a rather scary place.
If and when the crisis eases, Mr Tucker said you would hope and expect that banks would not feel the need for such a security blanket, but that time had not arrived yet.
So, no big move on capital. Thanks to the eurozone crisis, the Bank of England thinks commercial banks probably need all the capital they can get.
But Mr Tucker suggested that efforts by banks to build up liquidity - cash, or nearly-cash to fill short-term borrowing needs - were less welcome.
In effect, these efforts had diluted the effect of quantitative easing, by increasing the chance that the extra cash the Bank had injected into the system would sit idle on bank balance sheets instead of being re-lent.
He said the Bank should be working against this, by assuring banks that in these stressful times, they would always be able to get liquidity from the Bank of England itself. Here are the key lines from the speech on this:
"Central banks need to stand ready to provide liquidity to see the banking system through stressed conditions - without strings attached when the source of the stress is beyond banks' control. Accessing such facilities is perfectly normal.
"There is less of a case for regulators to require banks to rebuild their stock of liquid assets in current conditions. ... So far as possible, we should see whether we can liberate this part of their balance sheet in these stressed times. Whether we can do so may turn on whether the binding constraint comes from regulation or from the market."
This is a shift from the Bank's previous public position, because the governor had previously suggested that liquidity from the Bank should indeed come with "strings attached" in the form of a relatively high interest rate.
It will be interesting to hear what Sir Mervyn has to say about this. In the meantime, the message coming from Threadneedle Street is that they're going to give Plan A everything they can.