UK banks to make fewer loans available to consumers

In the light of the credit squeeze, there has been a tightening of all lending criteria but a further crackdown is being implemented, the Bank of England said.

The collapse of the US sub-prime mortgage market made banks unwilling to lend to one another and drove up market credit costs, pushing up mortgage prices and making residential property less affordable. Consumers have taken on £1.4 trillion of debt through home loans and unsecured borrowing such as credit cards.

However, in the next few months, households will be hit as UK banks have announced that they plan to make fewer loans available to consumers and companies in the first 3 months of 2008.

The Bank of England said there was a considerable reduction in mortgage lending made available to consumers during the 3 months to mid-December.

The announcement is a bit of a surprise to some as it was widely expected that the worldwide credit problems would have little impact on consumers with lenders predicting that mortgage lending would improve during the final quarter of 2007.

An economist at American Express Bank in London said the credit crunch is having an impact on bank lending and it’s feeding through to corporate and homeowners’ ability to borrow. There is a risk the economy could come close to recession.

Howard Archer, chief UK and European economist at Global Insight, said the availability of credit for households was expected to diminish further over the first quarter of 2008, which will add to the increasing downward pressures on consumer spending.

Mr Archer added the considerable tightening in credit conditions increased the pressure on the Bank of England to reduce interest rates again ’sooner rather than later’, suggesting that a cut could come as early as next week.

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