Credit crunch hits economy

By Matt Falloon

LONDON (Reuters) - Banks slashed the number of new home loans by a third in February compared to a year ago and sales of big ticket items fell sharply in March, in signs that the credit crunch impact is spreading beyond the hard-hit financial sector.

Mortgage lenders have tightened up loan terms in response to a global credit crisis that has made money more expensive on financial markets despite lower official borrowing costs.

Central banks have tried to alleviate the squeeze by pumping cash into the system under less strict terms than is normal.

But figures from the British Bankers' Association on Thursday showed those measures have done little to stop the crunch feeding into the real economy, with mortgage approvals at near-record lows last month and down by an annual 33 percent.

"In view of the credit squeeze, the accompanying tightening in mortgage lending standards, as well as fears of further house price falls, the subdued level of mortgage demand in February should be no surprise," said Seema Shah, a property economist at Capital Economics.

"Even interest rate cuts are unlikely to have much impact on the housing market as mortgage rates are falling less quickly than base rates."

The Bank of England is widely expected to trim interest rates by 25 basis points to 5 percent in April or May and Governor Mervyn King indicated on Wednesday that the credit crunch had left policymakers more predisposed to cutting rates.

BANKS TIGHTEN UP