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Warning to banks not to hamper recovery

Published 07/08/2009

The Bank of England has warned that the banking sector could hamper recovery from the recession as it pumped an extra £50bn into the flagging economy.

The surprise move — taking efforts to boost the money supply to £175bn — appeared to pour cold water on rising hopes that the UK will bounce back quickly from recession.

The Monetary Policy Committee (MPC), which left interest rates at a 0.5% record low, saw some hopeful signs but flagged up lower lending levels — with banks making more profits on the loans they are making.

The committee warned: “The need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending.”

Its decision comes after £6bn in combined profits from HSBC and Barclays on Monday, but losses of £4bn and £724m respectively from Lloyds Banking Group and the nationalised Northern Rock.

Figures also showed a £14.7bn fall in loans to businesses between April and June — raising questions over the effectiveness of the Bank's quantitative easing strategy.

IHS Global Insight economist Howard Archer said: “Bank lending to businesses remains very weak and spreads on bank loans are elevated, which is a serious threat to recovery prospects.”

Yesterday's move confounds speculation before the MPC's meeting that QE — buying up assets with newly-created money — could be paused amid encouraging signs from industry as well as rising house prices.

This week has seen better than expected output figures from manufacturing and services firms, an 18% rise in new construction orders and an increase in new car sales for the first time since April last year.

But the committee said the recession “appears to be deeper than previously thought”.

Rate-setters called financial conditions “fragile”, and warned that growth in the money supply — which it hopes will boost the economy — “remains weak”. Overall GDP also fell by a worse than expected 0.8% during the second quarter of this year.

Belfast Telegraph

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