Recovery doubts linger as lending remains stagnant
Despite attempts by the Government and the Bank of England to encourage the banks to lend to the “real economy”, the supply of credit to businesses is still shrinking, while the supply of mortgages is only crawling ahead.
The Bank of England data showed that loans to non-financial companies fell by £7.7bn in June, or about 6.4% a year. Lending to manufacturing decreased by £2.4bn.
Although volatile, the figures released yesterday do not present an encouraging picture of a banking sector returning rapidly to normal patterns of lending, and are the worst since the extraordinary £14bn contraction witnessed last July.
Unlike last year, the decline in lending by banks is not being offset by an increase in capital issuance in the form of bonds and commercial paper by private firms. These too fell by £3.9bn, the weakest in two years.
Mortgage lending is also running well below pre-crisis levels, and is again helping depress house prices.
The Nationwide Building Society reported a 0.5% cent drop in average house price values in July. It was worse than expected, and takes the quarter-on-quarter annualised rate of decline in this series to -5.5%.
As the Bank of England looks forward to its next Monetary Policy Committee meeting next week, the soft borrowing figures will strengthen the hand of those on the committee arguing for no change.
In his evidence to the Treasury Select Committee on Wednesday, Mervyn King, the Governor, said that there is “some considerable distance to travel” before rates could return to normal and that the MPC had its “foot firmly on the monetary accelerator”.
The Bank faces unusually sharp dilemmas about policy, as inflation will stay above the 2% target for “much of next year”, according to Mr King. They are made the more pressing because the Government has placed the main responsibility for securing the recovery on the MPC.
In an interview with Reuters, George Osborne, the Chancellor, said: “I have always believed that the greatest stimulating effect you can have in the economy is a monetary one not a fiscal one and the way to keep rates for longer... is by making sure fiscal policy is supporting and in this case means dealing with the budget deficit.”
The implication is that, should the economy enter the so-called “double dip”, it would be up to the Bank to boost the economy, not Mr Osborne.