Mortgage lending growth weak as credit crunch bites

Mortgage lending rose by much less than expected in January and approvals for home loans held near a record low, in a sign that house prices may have much further to fall.

The Bank of England said net mortgage lending rose by £690m in January, less than half analysts' forecasts for an increase of £1.5bn and much lower than December's £1.794bn rise.

The number of home loan approvals held steady at 31,000 in January, not far off a record low and against forecasts for a modest increase to 32,000.

The figures highlight the restrictive lending conditions being endured by consumers and suggest the housing market will remain in the doldrums for some time to come.

A survey published separately showed activity in Britain's manufacturing sector continued to contract sharply last month, with firms axing jobs at a record pace as demand plunged.

Together, Monday's data reinforced expectations that policymakers would cut interest rates by half a percentage point to a record low of 0.5 per cent on Thursday.

"The combination of falling output, weak inflation pressures and very low credit growth continue to suggest that the BoE can easily justify cutting rates on Thursday and aggressively pursue unsterilised asset purchases," said James Knightley, economist at ING.

The BoE has identified a shortage of credit as a major block to any economic recovery and is expected to soon start boosting the money supply to kick-start lending and encourage growth.