Credit squeeze set to intensify in 2009

By Christina Fincher and Fiona Shaikh

LONDON (Reuters) - The credit squeeze for families and businesses looks set to intensify into 2009 despite unprecedented measures to recapitalise the banking system and get lending flowing again, a survey showed Friday.

The grim news came as a deluge of data suggested the economy was plunging deeper into recession.

A survey from Halifax, the country's biggest mortgage lender, showed house prices fell a record annual 16.2 percent last month. Bank of England figures showed mortgage approvals slumped to a record low in November and a survey of purchasing managers showed manufacturing activity contracted in December for an eighth month running.

"There's no let-up in sight," said George Johns, an economist at Barclays Capital.

The pound resumed its slide on the foreign exchanges and two-year gilt yields fell below 1 percent for the first time as traders bet the Bank of England will deliver another hefty rate cut next week.

Interest rates have already been slashed to 2 percent, their lowest level since 1951. With the economy battered by the worst financial storm for 80 years, markets are pricing in another cut of at least half a percentage point next Thursday.

"Today's weak data is likely to add to the list of reasons for the Monetary Policy Committee to cut aggressively next week," said Amit Kara, an economist at UBS.

Kara expects rates to be cut to just 1 percent next week and to 0.5 percent by March. Interest rates have never gone below 2 percent since the central bank was created in 1694.