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Lenders in the UK last month approved the fewest mortgages for 18 months while secured net lending fell sharply, raising concerns about the already weak housing market.
The Bank of England lending data for June indicate that the turmoil in the eurozone is filtering through via the country’s banks and other financial institutions, whose own funding costs have been rising sharply.
Last month, the BoE and the Treasury launched several initiatives, including the funding for lending scheme, to try to lower banks’ funding costs and improve the flow of credit to the real economy.
Mortgage approvals for house purchases fell to 44,192 in June, the lowest since December 2010, and net secured lending fell by £355m. While monthly net lending has fallen in the past, most recently in June last year, the three-month annualised growth rate is now the lowest on record.
Samuel Tombs, an economist at Capital Economics, said the slump in mortgage approvals was probably exaggerated by the extra bank holiday for the Queen’s diamond jubilee. Nonetheless, the data showed the financial sector was “acting as an increasing drag on the economic recovery”, he said.
“Given our view that the eurozone crisis is likely to intensify, thereby weakening UK banks, we continue to expect weak money and credit growth to undermine the pace of the economic recovery for some time to come.”
Mortgage rates also continued to creep higher. The average standard variable mortgage rate rose to 4.22 per cent, the highest since February 2009, even though the official interest rate remains at a record low 0.5 per cent.
The BoE’s funding for lending scheme, which offers banks cheaper funding than they can access in the markets and makes more available if they expand their net lending, has just been launched. In its last meeting, members of the BoE’s Monetary Policy Committee said they were confident that this and other initiatives would “boost the supply of credit and provide a fillip to economic activity”.
The BoE data show that loans to non-financial companies continued to decline in June though there was an increase in lending to manufacturing companies.
M4, the Bank of England’s preferred measure of money supply, increased by £7.3bn in June, more than the average monthly increase in the previous six months. However, M4 lending fell £4.5bn after increasing by an average £1.3bn a month in the previous six months.
Separately, the latest monthly survey of retailers by the CBI business lobby suggested high street sales have slowed. In the first two weeks of July, 44 per cent of retailers said their sales volumes were up on a year ago, while 33 per cent reported a fall. This balance was weaker than a month ago and weaker than retailers themselves had predicted.
“Today’s data support the view that the sharp increase in the balance observed in June, which was boosted by the Queen’s diamond jubilee, was temporary and the underlying conditions in the sector are weak,” said Blenira Uruci, an economist at Barclays Capital.