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BoE report reveals lending to reduce even further

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by Kay Mitchell

The Bank of England’s quarterly credit conditions report, published today, has added to the doom and gloom surrounding the British economy, after it revealed that Britain’s banks and building societies are set to make even more cutbacks in their lending.

The report, which surveys lenders about the previous quarter and their predictions for the next quarter, confirmed that lending by commercial banks has already declined heavily since the onset of the credit crunch last summer.

The report is considered to be the best measure of how banks and other financial institutions are behaving.

Many companies in Britain have already warned publicly that a shortage of credit is causing them difficulties.

Earlier this week, Sixty UK, the company that runs both the Miss Sixty and Energie fashion labels, was forced to put its retail stores into administration after being unable to secure new credit lines.

Meanwhile, furniture giant MFI, was on the verge of administration last weekend after struggling to find ways of raising funds to pay its quarterly rent for its 190 stores.

Analysts are worried that British companies may soon find credit as limited as it has become in the US, where even major companies are being forced to pay far more for borrowing than in recent times.

According to Paul Dales of Capital Economics, the situation will only get worse from here. The report from the Bank of England does not take into account the events of the last few weeks so credit conditions will probably tighten by even more than expected, he said.

Worryingly, the report said that more borrowers are likely to default on their loans due to deteriorating economic conditions.

As a result of the report, many analysts in the City believe that the Bank of England may lower interest rates from 5% to 4.75% when it meets next week. Rates have remained the same since April in a bid to curb runaway inflation, which is currently at 4.4%.

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News posted: October 3, 2008

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