Lending is still falling, warns Bank of England

Author: By Sean O’Grady, Economics Editor

In its Trends in Lending report, published yesterday, the Bank of England said total net lending to business had fallen across all the main industrial sectors, that net mortgage lending remained close to its lowest levels and that consumer credit flows have stabilised at “very low” levels.

Separately, figures on growth in the money supply also indicated a relatively slow feed-through of the £125bn pumped into the economy via the bank’s programme of “quantitative easing”. The Bank added that there were signs that the cost of borrowing may start to be squeezed by an increase in competition later in the year.

Larger companies are increasingly turning to equity and bond markets to raise their funding. “Some UK businesses are reported to have been repaying bank debt using funds raised on the capital markets, contributing to the weakness in net lending,” the Bank said. “Net equity issuance was very strong in June, and overall this year there has been a marked change in corporate financing patterns.”

City concerns remain centred on the generally sluggish growth in money supply and lending, providing evidence as to why the Bank expanded the quantitative easing programme by £50bn to £200bn earlier this month.

“Given how much money the Bank of England has now pumped into the economy, broad money growth remains disappointingly weak,” said Vicky Redwood of Capital Economics. “We doubt the Monetary Policy Committee will be satisfied it has done enough until broad money growth has strengthened significantly from its current rates.”

The Bank of England’s warning overshadowed figures from the Council of Mortgage Lenders, which reported a 26 per cent jump in mortgage approvals in July, though from levels so depressed that lending remains 38 per cent down on this time last year, itself a difficult time in the property market. The CML said: “This is further evidence of a modest improvement in the market over the summer after an exceptionally weak winter, but activity is still subdued on any historic comparison.”

The stabilisation in prices and lending has helped to stimulate some building activity. The Department of Communities and Local Government said that housing starts and completions in the second quarter of this year were up 63 per cent and 24 per cent respectively on the first months of the year.

“This provides further evidence that the dramatic scaling back in house building activity has probably run its course,” said Brigid O’Leary, senior economist at the Royal Institution of Chartered Surveyors. “Significantly, housing starts by registered social landlords rose by 34 per cent, which suggests the increased funding by the Government is indeed having a significant impact on building activity.”

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