Weak bank lending threatens recovery and housing market

Economists expect setback to GDP figures for early this year

Bank lending to business and home buyers remains critically weak, according to the latest data from the Bank of England, endangering the revival in the housing market and the wider economic recovery.

Bank lending to "real economy" firms rose by just £100m in February – 0.3 per cent – and mortgage approvals fell back again.

The news comes as the revised figures for GDP growth in the fourth quarter of last year are due today. An upgrade from 0.3 per cent to 0.4 per cent is expected, but economists are more concerned about a setback in the early months of this year.

Some of the fallback in mortgages can be attributed to the depressing effects of the rush to borrow before the stamp duty holiday ended on 31 December, but analysts point out that the underlying trend remains feeble.

The Chancellor announced a new "holiday" in his Budget – a break for first-time buyers on all homes costing less than £250,000 until 2012, but the supply of mortgage credit remains constricted and the outlook for price rises subdued. The Council of Mortgage Lenders said it was "extremely difficult to assess how many buyers will qualify". Consumer credit and remortgaging were marginally stronger than other types of lending.

Nor will the Bank of England will be able to draw much comfort from the money supply data, also released yesterday. After the Bank's £200bn programme of quantitative easing over the past year, designed to inject money directly into the economy, money supply rose by 0.3 per cent in the month to February, but the three-month moving average remains in negative territory.

Money supply, on the Bank's preferred measure, is up 0.4 per cent, or £6bn on last year. Bank lending is £167bn lower than this time in 2009. Bank officials have always argued that the situation might be far worse now but for the interventions they have made – 0.5 per cent Bank Rate and QE – but money supply growth is some way off the nominal growth of around 6 per cent plus that might be expected in an economy starting to behave normally again. Few analysts expect an early return to normal interest rates.

The Bank will also be conscious of the effects of its decision to withdraw approaching £200bn in cheap funding from the commercial banks when the Special Liquidity Scheme ends in 2012. For regulatory reasons it wishes to end this special arrangement, which induces moral hazard; for macroeconomic purposes it may wish to revisit the policy.

Of immediate concern to households will be the trends in lending for house purchase. With mortgage approvals falling back slightly to around 47,000 in February, many in the real estate world express only tentative optimism.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "Lack of mortgage finance and uncertainty stemming from the approach of the general election will remain a drag on activity, but our suspicion is that mortgage approvals will still climb back above 50,000 per month during the spring."

Pricing is becoming a little keener: the average rate on mortgages advanced in February fell to 3.83 per cent, from 3.9 per cent in January, and has declined each month from 4.34 per cent last August. The largest falls have been on shorter-term fixed rates. The average rate on all outstanding loans was unchanged at 3.67 per cent in the month.