Lending squeeze set to get worse, says Bank

The credit squeeze on consumers and businesses is set to intensify over the coming three months, the Bank of England said today.

Banks and building societies told the Bank they expect to cut the amount they will offer to consumers in secured lending - mainly mortgages - even more severely in the second quarter of the year than they did in the first three months.

The lenders said that growing economic uncertainty and the credit crunch was forcing them to take fewer risks at the same time that the cost of wholesale borrowing on the money markets remained high.

The gloomy official survey will heighten hopes that the Bank will cut interest rates when it meets to decide rates next week.

But today's findings suggest that the last two rate cuts, each of a quarter of a percentage point last December and in February, have failed to filter through to benefit either households or companies. The cost of borrowingas measured by the difference-between the official Bank of England interest rate and what banks and building societies charge has risen sharply and will go higher.

The Bank said: "The reduction in secured credit availability was associated with a reduced risk appetite and increased concerns about the macroeconomy and the housing market."

The survey comes as a series of banks and building societies including First Direct, Nationwide and NatWest have either stopped offering mor tgages to new customers completely, withdrawn their best mortgage deals or raised their interest rates on mortgages.

The trend continued today with the Woolwich increasing rates on its lifetime tracker loans by between 0.55 per cent and 0.7 per cent.

C&G followed suit, limiting the amount of business it would take on by reducing the amount it was prepared to lend borrowers with £1 million-plus mortgages from 90 per cent to 80 per cent of the value of the property.

The Bank of England also said that lenders expect to cut back on unsecured lending, which covers both credit cards and overdrafts, in the coming three months.

It added that more borrowers had failed to keep up repayments on their loans and mortgages in the first three months of the year than in the previous quarter and they expected the losses that come from such defaults including repossessions to rise further.

There was also a strong surge in remortgaging, according to the lenders, mainly as people came to the end of their fixed-rate terms and looked to find new deals.

First Direct closed its doors to new customers this week saying that it had been swamped by five times as many applications as usual since the start of the year.

Today Co-operative Bank confirmed that it had withdrawn its two-year fixed rate and many regional building societies have restricted their best fixed-rate mortgage deals to local housebuyers only.