Business lending slump puts pressure on Bank of England

ECONOMISTS yesterday warned that the Bank of England's £200 billion efforts to kick-start money supply are proving ineffective after new evidence emerged of a slump in lending to businesses and consumers.

• Bank of England under pressure to increase its quantitative easing programme Picture: Getty Images

The central bank now looks increasingly likely to expand its quantitative easing (QE) programme, aimed at boosting money supply, to stave off the threat of a double-dip recession.

But business groups have called for more to be done to ensure the extra money supply feeds through to the economy after it emerged that lending to companies fell for the 11th successive month in July. The Bank of England also said that net mortgage lending slumped to the fourth lowest level on record, reinforcing fears of a new slump in the housing market.

The figures provide fresh evidence that weak credit continues to threaten the economic recovery despite the 200bn QE programme. Charlie Bean, the Bank's deputy governor, hinted at the weekend that policymakers would consider further monetary easing in order to sustain the economic recovery. Bean told the US Federal Reserve's annual symposium that while central bank liquidity measures had helped prevent a financial market collapse, further injections may be required.

The Bank's latest data showed that lending to private businesses fell by 0.4 per cent in July, a slight improvement on the 0.5 per cent slip in June, with the annual growth rate in money supply down to 1.2 per cent. But Colin Borland, public affairs manager for the Federation of Small Businesses in Scotland, said reduced demand for bank lending didn't mean there was no demand for business finance.

"While banking reports and commissions consider medium to long-term options, we need a solution for the short-term to support those businesses that will create the employment that Scotland, and the rest of the UK, so badly needs," said Borland.

"While we support keeping the Bank of England's interest rate at its historic low (of 0.5 per cent] and believe that another round of quantitative easing may be necessary, more work needs to be done to ensure that this money reaches the wider economy."

Howard Archer, chief economist at IHS Global Insight, attributed the continued decline in lending to companies to a combination of low corporate demand for credit and restricted supply. "Even allowing for this, though, the Bank of England data maintain concerns that ongoing tight credit conditions remain a significant impediment to economic activity and it is a particular problem for smaller companies," he said.

Archer added that the figures reinforced the case for the Bank to revive its QE programme to fend of the threat of a slump back into recession.The central bank revealed there was a modest increase in mortgage approvals between June and July but net mortgage lending plunged from 518 million to just 86m over the same period as homeowners repaid more than they borrowed.