Bank of England sees further fall in lending

(FT)- Access to credit became more difficult for both companies and households last quarter, while lenders hit by wholesale funding worries and house price gloom expect to restrict credit even further, the Bank of England said on Thursday.

The Bank's quarterly survey of credit conditions showed 31 per cent of lenders, weighted by market share, had tightened availability of mortgage finance in the last three months. More than 25 per cent expected to tighten credit conditions further over the next three months.

The previous quarter's survey showed lenders had expected households to be unaffected by the credit squeeze.

Thursday's report suggests tighter credit availability has been a significant factor behind the recent housing market slowdown, although lenders expect demand for all types of mortgages to fall over the next three months and default rates, so far little changed, to increase.

The Bank said lenders' lower risk appetite could reflect their finding it harder to raise new capital or to transfer risk off their balance sheet through securitisations . However, lenders' own survey responses suggested their outlook for the coming months was influenced more strongly by the economy and housing market concerns than by tighter funding conditions.

Malcolm Barr, economist at JP Morgan, said this raised "the worrying spectre " of declining mortgage credit availability undermining house prices even if market conditions improved.

Some analysts said the survey, conducted in November and December at the peak of credit market turmoil, could be more gloomy than justified by the relative calm that has recently prevailed in financial markets.

But Mr Barr said the weak tone of the report, combined with dismal news from the US manufacturing sector, "significantly raises the odds of a cut at next week's monetary policy committee meeting". Alan Clarke at BNP Paribas added: "Why would the MPC wait until February?"

However, wider spreads on prime mortgage and buy-to-let borrowing would "limit the support to the housing market of further cuts in the base rate", according to Kelvin Davidson at Capital Economics. Lenders' requests for higher minimum deposits could reflect a wish to protect themselves from any falls in house prices, Mr Davidson said.

The survey helped send the pound lower. Sterling dipped 0.6 per cent to a fresh record low of ?0.7481 against the euro, lost 0.4 per cent to $1.9740 against the pound and tumbled 1.1 per cent to Y214.20 against the yen.

The Bank said funding constraints had also led lenders to cut credit availability significantly for corporate borrowers of all sizes - especially in the beleaguered commercial property sector - by raising rates and fees and tightening non-financial conditions.

Lenders reported lower demand from non-financial companies, who were instead drawing down on credit lines already committed, but they expected a surge in borrowing from other financial corporations.

Michael Saunders, economist at Citigroup, said rising loan demand from non-bank financial institutions was "presumably a sign of distress borrowing" as they faced an even bigger rise in costs for other forms of borrowing.

The cut-back in corporate lending came despite corporate profitability that reached record levels in the third quarter, according to official data released on Thursday.

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