Banks 'still not lending to small firms'

As Treasury ministers continue to press major banks to agree targets for lending to small business, in return for more freedom to pay an estimated £7bn in bonuses, the Bank of England says that small firms are still finding access to credit "tight".

According to soundings taken by the Bank's network of regional agents, credit conditions are "improving" for large firms, with the availability of credit for some "more or less back to normal". But small- and medium-sized enterprises are facing discrimination from the banks, in spite of assurances given to the Bank, to ministers in the Coalition and to the preceding Labour government.

The Bank suggests that some small companies have given up on bank credit, which may, perversely, serve only to reinforce the banks' claims that the demand for credit is weakening: "Many small firms were focused on paying back past borrowing to regain control over their financial arrangements."

Following the shock news on Tuesday that the economy contracted by 0.5 per cent in the final months of 2010, the British Bankers' Association has said that mortgage approvals are running at near-two-year lows, falling back to the levels last seen in the depths of the credit crunch in 2008. The Bank of England also warned that house prices are expected to fall further in the coming months.

The growing political tensions echoed in the arguments within the Bank of England over when, or even whether, to raise interest rates have been uncovered with the publication of the minutes of the Monetary Policy Committee.

Policymakers are split three ways on the next move, with two MPC members, Andrew Sentance and Martin Weale, now in favour of raising rates, and one, Adam Posen, arguing for a further injection of money into the economy. The Governor of the Bank, Mervyn King, has warned that inflation will rise to 4 or 5 per cent this year.