July 29, 2009 / 11:48 AM / 10 years ago

Homes borrow least money in 15 years

LONDON (Reuters) - Financial institutions lent less money to households last month than at any time in the past 15 years, overshadowing a modest rise in mortgage approvals, official data showed on Thursday.

A woman walks past an estate agent's window in Edinburgh, February 19, 2009. REUTERS/David Moir

More doubt was cast on the effectiveness of the Bank of England’s quantitative easing policy — which aims to combat a shortage of cash caused by the credit crunch — after headline M4 money supply suffered its biggest drop since September 2004.

“The Bank of England has repeatedly stressed recently that it will take time for quantitative easing ... to fully feed through to support bank lending. There continues to be little hard evidence of this so far, which is potentially worrying for recovery prospects if the situation persists,” said Howard Archer, chief UK economist at IHS Global Insight.

Net lending rose by 414 million pounds in June, down from a 485 million increase in May, barely a ninth of last June’s rise after both new consumer credit and mortgage lending were much less than economists had expected.

This was the weakest figure since the Bank began collecting this data in April 1993.

New unsecured consumer credit slumped to 71 million pounds confounding economists’ forecasts of a 300 million pound rise and also less than half a net 153 million in May, also revised sharply downwards.

Net new mortgage lending edged up to 343 million pounds from 331 million, again far less than the 600 million pounds in net lending that economists had expected.

The one bright spot was mortgage approvals, which were a shade ahead of economists’ expectations at 47,584, up from 44,169 the previous month. That was the highest total since April 2008 and tallies with other surveys pointing to a levelling off in the decline in housing market activity.

“The comforting news is that it’s bottomed out and is trending higher,” said Alan Clarke, UK economist at BNP Paribas.

MURKY M4

Headline M4 money supply fell by 0.2 percent in June, the biggest drop since September 2004, for an annual rise of 13.8 percent — the latter figure being distorted upwards due to financial market turmoil over the past year, economists said.

The Bank will have to make a tough call at its August 5-6 policy meeting next week on whether to expand its quantitative easing programme now that the 125 billion pounds of newly created money it approved has been spent, mostly on gilts.

Bank Governor Mervyn King has said the policy’s main aim is to boost the money supply, and thereby total spending in Britain’s recession-hit economy, while other policymakers have also looked for a direct effect on bank lending.

One of the Bank of England’s preferred gauges of money supply, M4 excluding intermediate other financial corporations, fell 0.6 percent on the month — the biggest drop since December — though more accurate quarterly data is due out on August 4, just before policymakers meet.

A slightly more positive picture emerged from households’ M4 holdings, which rose by 0.3 percent in June and May, and from private non-financial corporations’ holdings, which increased by 0.5 percent after a 0.6 percent drop the month before.

“This is not proof that QE is working or even that a firmer trend is in place, but at least the figures are in the right direction this month. Overall these financial flow numbers are moderately encouraging for economic prospects,” said Philip Shaw, economist at Investec.

Other economists were more downbeat about the data.

“There is still little sign of the pick-up in bank lending growth that we think is necessary for a strong and sustained recovery in the wider economy,” said Vicky Redwood, UK economist at Capital Economics.

Editing by Richard Balmforth

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