No end in sight to liquidity crisis

The Bank of England has warned there is no end in sight for the ongoing credit crunch in its latest Credit Conditions Survey.

Reporting earlier today, the Bank reported "lenders had further reduced the availability of credit to households and corporates" over the past three months – with a net 47 per cent of lenders cutting credit.

The reduction in secured credit availability was enacted partly by tightening credit scoring criteria, and largely by decreasing maximum loan-to-value (LTV) ratios on lenders' products, finds the Bank.

Perhaps more worryingly the report also states: "Lenders expected some additional reductions in credit availability over the next three months."

Some 22 per cent more lenders expect credit to be reduced further over the third quarter, than expect levels to rise.

The planned reduction was precipitated by expectations for the housing market, the changing economic outlook and changes in a decrease in the appetite for risk.

In a further worrying sign for the UK economy lenders reported that, in line with their first quarter expectations, default rates, and losses on loans in default, on secured lending to households had risen over the past three months.

However, there were some positive signs.

While demand for secured loans for house purchase was reported to have fallen over the past three months, explained by weaker-than-expected demand for prime and other lending, demand for buy-to-let lending was reported to have been stronger than expected.

Yet, lenders expected demand for lending for house purchase to fall further over the next three months.

Bank of England research released earlier this week also shows mortgage lending is presently at an historic low.

Commenting on the figures Howard Archer, chief economist with analysts Global Insight, said: "Members of the Bank of England's monetary policy committee (MPC) have repeatedly highlighted that tight credit conditions pose a particularly serious downside risk to consumer spending, business investment and the housing market over the coming months.

"Along with news that service sector activity contracted in June, tighter credit conditions heaps pressure on the Bank of England to hold off from raising interest rates despite current elevated inflation levels and risks."

Chris O'Toole