Fears for recovery grow as lending slips again

Credit levels fall by £300m as households pay off debt
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The Independent Online

Households are saving more and trying to pay off debt at the fastest pace in years, raising concerns that the Bank of England's policy of quantitative easing – directly injecting some £175bn into the economy – is not yet having as dramatic an impact on spending and credit growth as some might have hoped.

For the second month running, consumers overall paid back more than they owed on their consumer debts, said the Bank. Consumer credit fell by a net £300m, with an increase in credit card lending of £200m offset by a £500m drop in personal loans and advances. Including mortgages, net lending to households rose by £700m in August, following the first ever monthly fall in July. Mortgage approvals fell marginally to 52,317 from 52,404: levels that analysts say are well below those needed for a sustained trend of rising house prices. Net new borrowing for home purchases rose by £1bn in August, from extremely low levels.

Commenting on the latest news, David Kern, the chief economist at the British Chambers of Commerce, said: "It is important for the Bank of England to address the dangerous weakness in bank lending, and the Government must take steps to curb falls in employment. The main priority is to ensure that businesses are able to return the economy to sustainable growth as early as possible."

The Bank of England organised a seminar for City economists yesterday at which it indicated that it does not plan imminent changes to the way it treats the reserves held by commercial banks at the Bank. Speculation has been rife that the Bank will soon introduce "negative interest rates" to, in crude terms, encourage the banks to lend those reserves rather than hoard them.

Figures released yesterday on the growth of "broad money" suggest that lending has responded sluggishly to the Bank's stimulus, although a general reduction in gilt yields may have eased the cost of lending, and prompted a marked increase in bond and equity fund raising by larger firms.

Colin Ellis, economist at Daiwa Securities, commented: "We think the case has been made for the monetary policy committee to increase its QE programme – although probably not before November. Whether the Monetary Policy Committee agrees remains to be seen. If anything, the recent signals from the bank, such as Governor Mervyn King's remarks at the Treasury Committee, suggest that the Bank is rather more optimistic than us about the impact of QE.

"That could mean it ends up doing too little (or moving too late), further lengthening the recovery and costing more jobs. The MPC already made several errors coming into the recession – and it needs to be careful now not to make further mistakes as the economy is showing signs of life."

The Royal Institution of Chartered Surveyors' chief economist, Simon Rubinsohn, added: "Net lending is still way down on pre-credit crunch levels.

"New instructions to estate agents have begun to pick up in recent months, supply is still some way down on the current level of demand, which helps to explain the firmer tone to prices. This trend is likely to persist."

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