Bank of England tells lenders to remain cautious

Bank of England Monetary Policy Committee (MPC) member Kate Barker was quoted today as saying it was right for banks to be cautious about lending in the face of rising unemployment and housing repossessions.

In comments to a panel discussion on 20 April, extracts of which were published on the "Mortgage Introducer" industry website, Barker's future colleague, David Miles, due to join the MPC in June, said banks should also be required to hold more capital.

"Once the dust settles, it will be sensible for institutions to have substantially more capital than was thought necessary before the credit crunch," Miles was quoted as saying.

Barker was quoted as saying that lenders "are right to be extra careful today in light of future uncertainties, with unemployment and repossessions continuing to rise."

House prices have lost a fifth of their value in little more than a year as the credit crunch prompted banks to cut back on lending.

Bank policymakers have said restrictive lending practices pose the greatest threat to an economic recovery.

But borrowing costs for households and businesses are still high even though the central bank has slashed official interest rates to a record low of 0.5 per cent and started buying assets to get cash flowing around the economy.

A sharp slowdown in the economy and rising unemployment are also making people more reluctant to take on debt.

Barker also said the Government should be flexible in its house-building targets, saying they looked very difficult to meet.

"The existing target of 240,000 new homes per year by 2016 is difficult, if not impossible, to meet," she said.

"When the housing industry was booming, we still only achieved 200,000 new homes in one year, which raises the prospect of prices rising sharply again in the future."

Miles said the banks' unwillingness to offer high loan to value ratios in mortgages for first-time buyers would mean people would get onto the home-ownership ladder later in life.

"Reduced loan-to-values will bring about an increase in the age of the average first-time buyer, as we return to a culture of saving for deposits," he was quoted as saying.

He said this would probably mean the private rental sector would need to expand through private buy-to-let landlords or professional investors.