Lending is up – but so is the cost of borrowing

Banks fail to pass on low rates to homebuyers, shoppers and businesses

Businesses and homebuyers are raising more funds from the banks and building societies, according to the Bank of England and the Council of Mortgage Lenders (CML) – but it is costing them dearly, as the banks continue to fail to pass on ultra-low finance provided by the Bank of England.

Net new lending to UK business amounted to a mere £100m in November, said the Bank. While this is the first positive figure since January 2009, it is way below even the monthly averages of around £3.8bn observed during 2008, itself a depressed time; demand for credit remains weak.

The Bank says the cost of credit to businesses is rising, a trend also observed in the mortgage market, where the Skipton Building Society this week became the latest lender to hike its standard variable rate. In the case of consumers, credit card interest rates are approaching 20 per cent – their highest in a decade, even though the Bank Rate is 0.5 per cent.

However, official statistics released yesterday showed that government borrowing is more subdued than had been feared by the markets, which will ease pressure on the Treasury. At £15.7bn it set a December record, but was below the £18bn of consensus expectations.

Yesterday the Bank of England, in its Trends in Lending report, said: "The flow of net lending to UK businesses rose in November, though remained subdued... The effective rate on new lending increased." The Bank said that its measure of the effective interest rate on new or refinanced corporate lending – taking into account fees, for example – has risen from 2 per cent in August to 2.4 per cent in November, even though "three-month Libor has edged lower".

Such trends affect smaller and medium-sized enterprises especially strongly – larger firms have been able to tap buoyant capital markets for their needs. The Bank added yesterday that gross capital issuance in December fell to £44.8bn, from recent monthly averages of £50bn to £60bn. Sceptics say that the Bank's policy of quantitative easing – a £200bn injection of money into the economy – has failed to show up in lending or money supply figures. The Bank said yesterday that M4 lending fell by 0.2 per cent for the second month running.

Both the CML and the Bank agreed that mortgage lending edged up again in the last months of the year, against the usual seasonal downturn. The CML reported that gross mortgage lending reached an estimated £13.7bn in December, up 14 per cent on November. A rush of sales before the end of the stamp duty holiday and the prospective hike in VAT accounted for much of the improvement.

Households paid off a further net £400bn of their consumer debts in December, prompted by limp confidence and higher costs, especially for credit cards. The Bank added that: "Spreads between effective interest rates on consumer credit and Bank Rate and Libor remained significantly wider than a year earlier."