'Disappointing' start for bank lending scheme

The Bank of England's Funding for Lending (FLS) scheme made a "disappointing" start in August as loans to businesses and households dropped by £5bn, experts said yesterday.

The steep fall contrasts with an average monthly £900m rise in lending over the previous six months, according to the Bank's latest lending statistics. Although one-off factors like the Olympics are likely to have played a part, bank lending to UK businesses dropped £1.2bn, while household loans dropped £600m.

Loans from banks to other financial bodies like pension funds also fell by £3.1bn, but analysts were more concerned by signs of declining lending in the real economy.

Chris Crowe, an economist at Barclays Capital, said: "The decline in corporate and mortgage lending marks a disappointing start for the Funding for Lending scheme."

The detailed figures showed average interest rates on new savings in August down 0.1 per cent, as the cheap funding on offer from the Bank gave banks less incentive to attract retail deposits. The average rate on loans to businesses edged only marginally lower, to 2.66 per cent.

Michael Saunders at Citigroup said: "The data suggest FLS has not produced significant, immediate results in improving the growth or price of credit."

The Bank's credit conditions survey last week said lenders were gearing up for a big expansion of mortgage lending in the final quarter of this year but mortgage approvals were virtually flat in August at 47,655. Moreover, jittery consumers also paid back £410m in unsecured loans and mortgages during the month.

Nida Ali, the economic adviser to the Ernst & Young Item Club, said: "The lending figures were much worse than expected, particularly as the Bank of England's latest survey reported that lending to households … had increased significantly."

A Bank spokesman said: "Early indications suggest the FLS is having an impact, but it is unrealistic to expect to see that in lending figures for August."