U.K. Lenders Expect Further Credit Curbs, BOE Says
The Bank of England signaled that financial institutions may reduce mortgage and corporate lending and a separate report showed services expanded in March at the weakest pace in four months.
Banks predict a “slightly larger'' reduction in home loans in the next quarter after offering fewer of them in the past three months, the central bank said today, citing a survey. For companies, they also forecast a further squeeze on credit, the quarterly report said.
Bank of England Executive Director Paul Tucker said yesterday that policy makers, who meet next week, may seek to cut interest rates “gradually'' from the current 5.25 percent to limit slowing growth. The central is struggling to ease credit conditions in the economy as lenders including Nationwide Building Society refuse to pass on two rate cuts since December.
“A significant set of data this morning makes an April cut from the Monetary Policy Committee at next week's meeting look like a near certainty,'' said Allan Monks, an economist at JPMorgan in London.
The pound was little changed at $1.9784 after the report. Against the euro, it was at 78.66 pence, down from a record 79.82 pence on March 31.
An index of services from banks to airlines fell to 52.1, the lowest since November, the Chartered Institute of Purchasing and Supply reported today. U.K. mortgage approvals stayed close to a nine-year low in February, the central bank said yesterday.
Default Rates
Default rates and losses on mortgages will increase further in coming months, lenders told the Bank of England. For companies, default rates picked up “more sharply than expected'' and will rise again in the next quarter.
Demand for mortgage loans stayed “broadly unchanged'' in the past quarter and may fall in the next three months, lenders told the central bank. Banks expect credit spreads to widen further for households after a “marked increase.''
Nationwide Building Society, the U.K.'s biggest customer- owned home lender, said March 27 it will stop offering four of its two-year loans and increase the rate on its “tracker'' mortgages credit report. Royal Bank of Scotland Group Plc's Natwest banking unit this week raised the cost of outstanding loans for its so- called offset mortgage products. Offset loans require borrowers to have a checking account with the bank.
Consumers are already burdened with a record 1.4 trillion pounds ($2.8 trillion) of debt. Personal loans and overdrafts rose to 2 billion pounds, the highest since records began in 1993, the central bank said yesterday. Net consumer credit, which also includes credit-card lending, was at the highest level since 2002.
`Marked increase'
Spreads for company loans will rise “significantly,'' with banks anticipating a further “marked increase,'' the central bank said today. It carried out the quarterly survey from Feb. 25 and March 19.
Morgan Stanley and Oliver Wyman said in a joint report on April 1 that credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the bursting of the dot-com bubble.
U.K. economic growth will almost halve to 1.6 percent in 2008, the weakest since 1992, the year after Britain had its last recession, the average forecast of 22 economists surveyed by the Treasury last month showed.
British companies' profitability still rose to the highest on record in 2007, with the net annual rate of return for U.K. non-financial businesses rising to 15.2 percent last year the Office for National statistics said yesterday. In the fourth quarter, the rate reached 15.5 percent, the most since quarterly data started in 1989.
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