Lending squeezed over coming months

Published: Thursday, 2 October 2008, 10:44AM

Banks and building societies will cut lending further to households and businesses in the coming three months, the Bank of England says.

As the economic outlook continues to deteriorate, an official report has said lending to households and companies, which has already fallen steeply, will be tightened further in the third quarter of 2008.

The BoE's quarterly Credit Conditions Survey, conducted between August 26 and September 17, shows a bigger than expected decline in mortgage lending and credit lines. Banks said they expect defaults on all lending to increase over the next three months.

The survey said: "Lenders reported that the changing economic outlook, their expectations for the housing market, and changes in their appetite for risk had contributed to the decline in credit availability.

"These factors, together with tighter wholesale funding conditions, were expected to contribute to the tightening in credit over the next three months."

The BoE survey showed unsecured lending fell as expected in the three months to mid-September, with a similar decrease forecast for the next three months.

Its gloomy outlook is likely to reinforce expectations for interest rates to fall from 5 per cent, perhaps as soon as next week, given further evidence of a marked slowdown in the economy and the deepening global financial crisis.

The Nationwide, one of the UK's biggest mortgage lenders, has reported a 1.7 per cent fall in house prices in September, taking the annual rate of decline down to 12.4 per cent - its sharpest annual fall in 17 years.

Major central banks have been pumping cash into the money markets to try and encourage banks to lend to each other and, in turn, make it easier for them to lend to consumers and companies.

However, interbank lending rates remain high amid bank failures and falling asset prices.

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