Fears rise that the Bank of England will not cut interest rates, which would reduce lending.
Analysts predict that when the Monetary Policy Committee (MPC) meets on Thursday, the Bank of England will not cut interest rates to a historic low. Though there has been a worrying slump in lending by banks this will not be enough for them to cut the interest rates.
Figures out for June showed that the number of new mortgages approved were at their lowest level for 18 months and all forms of lending saw the smallest rise for two years. This has created fear that Britain could fall into an unprecedented ‘triple-dip’ recession.
There is no doubt the MPC will consider the benefits of cutting the interest rates to 0.25 per cent. The recovery seems further away than many people had predicted, and leading economists are warning that if Greek exit from the EU it could put the UK in financial chaos.
If the interest rates are cut analysts are concerned whether this will actually increase lending. Yes, mortgages and loans should be cheaper, however savings would not earn much interest and this could mean saver would be tempted not to bother putting their money into banks, this in turn could reduce the money they have available to lend.
Also a rates cut will reduce lenders existing assets making margins a lot less for them which will also hinder their ability to offer new loans.
UK and euro zone economist at Scotia bank Alan Clarke said ‘The poor GDP data makes it hard for the Bank of England not to loosen monetary policy further.)’
‘However, we judge that a further reduction in bank rate could backfire and hold back the creation of new mortgages. Hence we suspect that the further policy ease will be in the form of more quantitative easing (QE), not a cut in bank rate.’
The new £80billion ‘funding for lending’ scheme was aimed at kick-starting bank lending. At their July meeting the bank raised the notion that this could lessen the pressure about the impact of a rate cut.
Economist at Investec Philip Shaw said ‘another QE boost was more likely and predicted a further £50billion in November when the current round is completed.
He said: ‘we suspect for now the Bank will plough on with its primary stimulus tool, quantitative easing.’
Howard Archer at IHS Global said: ‘The MPC indicated in the minutes of their July meeting that they had no plans to bring interest rates down from their current level of 0.5 per cent in the near term at least.’
In the Banks 318 year history if they did reduce the rate to 0.25 per cent it would be the lowest ever.
Home loans in June according to the banks own figures were 44,192 this was down from May which was 50,544 and the lowest level since December 2010.
The level was down 10 per cent on June last year, and they said it was ‘exceptionally weak’. Different surveys have shown that consumer confidence is at rock bottom, and there is a big slow down on sales in the high street.
An economist at investment bank Citi Michael Saunders said the data ‘looks like a precursor to continued economic stagnation rather than recovery’.