Bank of England: Credit crunch worsens

UK lenders restricted the number of mortgages they provided by great than expected in the last three months, the Bank of England revealed.

The central bank's Credit Condition report shows "expectations for house prices and concerns about the economic outlook" led banks and building societies to reduce the amount of mortgages available.

In coming months the mortgage crunch is expected to continue as wholesale funding conditions also tighten and banks lose their appetite for risk.

Unsecured credit – the form of personal loans, credit cards and overdrafts – also diminished.

The Bank of England also revealed demand for mortgages and remortgages "declined sharply" over the three months and demand was expected to fall further.

The survey of lenders also revealed rises in default rates on mortgages and loans and higher levels of people unable to pay their debts is expected as the economy continues to struggle.

Howard Archer, chief UK economist at Global Insight, explained the Bank of England data show the cost of borrowing is rising.

"Significantly, this survey was completed in mid-September and credit conditions have tightened markedly further since then as a result of the heightened financial
sector problems."

He added with the Bank's interest rate-setting monetary policy committee (MPC) concerned about the effect of the credit crunch on consumer spending – an cut in the cost of borrowing was likely.

"We now think it is highly probable that the Bank of England will cut interest rates next week despite still rising consumer price inflation," Dr Archer said.

"We expect interest rates to be cut by 25 basis points from 5.00 per cent to 4.75 per cent, but would not rule out a 50 basis point cut to 4.50 per cent given that the tight credit conditions mean that a 25 basis point cut is likely to have only a very limited impact."

He added there was a possibility interest rates could fall to three per cent in 2009 as the economy faces recession.