Weak UK lending shows challenge for BoE credit scheme

Thu Aug 30, 2012 8:39am EDT
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By David Milliken and Sven Egenter

LONDON (Reuters) - Lending to British businesses and consumers weakened further last month after the biggest fall in credit card borrowing in almost six years, highlighting the challenge faced by the Bank of England as it readies a new scheme to boost credit.

Despite more than 325 billion pounds of government bond purchases over the past three years, lending conditions remain tight for households and smaller firms with the economy back in recession since late last year, prompting BoE Governor Mervyn King to announce a new scheme in June to aid these sectors.

Some economists expect this Funding for Lending Scheme, which opened for business on August 1, to reduce the need for the BoE to buy gilts to stimulate the economy. But BoE official Paul Fisher warned on Wednesday that it would take more than a few months before the FLS takes full effect.

The most striking number from the BoE's July lending data was a 147 million pound net repayment of credit card bills -- the biggest fall in this type of lending since August 2006, when the 150 million pound decline was the biggest on record.

This drove a 220 million pound drop in overall unsecured consumer lending, the biggest since February, but arguably just as important are figures showing that lending to non-financial companies is 3.4 percent lower than a year ago.

"Overall there is little in these data to suggest a break from recent trends. Business lending continues to contract, while household sector lending is rising at a very modest rate," said BNP Paribas economist David Tinsley.

A bigger-than-expected 1.1 billion pound rise in mortgage lending to households helped counteract the fall in unsecured lending, and the pace of contraction in corporate lending seemed to be slowing.

But overall the figures dampen hopes of a strong rebound in economic activity in July after nine months of recession, and back economists' forecasts for British house prices to stay flat or fall slightly over the coming year.   Continued...