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March 2, 2010 2:00 am
New figures on bank lending offered a mixed picture of the British economy yesterday, although the message was tempered by another strong reading on a manufacturing survey.
On a positive note, Bank of England data revealed that its chosen measure for the success of quantitative easing - "M4 broad money" minus funds held by intermediate financial companies - grew at an annualised rate of 1.9 per cent in the three months to January. This was the best reading since the Bank began tracking it every month in the middle of last year.
"One clear argument in favour of keeping the QE limit unchanged in February was to monitor for the impact of the easing delivered so far," noted Richard McGuire, fixed interest strategist at RBC Capital Markets. "Today's data provide a tentative sign that the Bank's unconventional policy efforts are now beginning to bear fruit."
However, other Bank data suggested that bank lending to private non-financial companies - the businesses that form the backbone of the economy - fell by £500m in January. On a year-on-year basis, lending growth at just 2.7 per cent was the lowest since October.
One hint of forces behind the weak lending to business was the sharp rise in write-offs in sterling and foreign currency-denominated loans to the sector in the fourth quarter of 2009. The Bank reported that these more than doubled from the third quarter to £2.7bn.
Michael Saunders, a Citi economist, said one sign of strain in business lending was that the pricing on loans of under £1m was rising relative to that on loans of £20m or more. The differential widened to 1.1 percentage points in January from 0.8 points over the previous two years.
"Banks are lending, but only at very wide margins to their own cost of funds," said Mr Saunders.
Also, margins on loans to homebuyers - of whom there were roughly 10,000 fewer in January than in December - remain wide. The average interest rate on a two-year, fixed-rate mortgage for buyers with a 25 per cent deposit fell in January to 3.97 per cent, the lowest since July 2003.
However, at that time, the Bank had just cut interest rates to 3.5 per cent, illustrating just how far above Bank rates mortgage pricing remains. Although official rates are at a historic low of 0.5 per cent, banks and building societies are competing hard for retail deposits to replace maturing wholesale deposits and those from foreign lenders that are being withdrawn.
Banks' average standard variable rate - which homeowners generally revert to when their fixed-rate loan ends - rose in the month to an average of 4.08 per cent.
Meanwhile, the Chartered Institute of Purchasing and Supply's Markit purchasing managers' index for the manufacturing sector in February maintained the 15-year high it registered in January at 56.6, with employers reporting a record one-month jump in export orders . The export sub-component registered 60.5 - up from 57.5 in January.
The employment sub-component slipped, but stayed above the 50 mark that indicates growing demand.
The CIPS also identified some worrying trends building up on the inflation front. Input prices recorded a sharp jump, with that sub-component reading at 65.3, suggesting rapid rises.
Manufacturers reported that higher commodity, energy, metal and paper prices were putting pressure on their own costs. Also, the reversion of value-added tax to its pre-crisis rate of 17.5 per cent is likely to add to inflation
Output prices rose, but more modestly. That component registered 54.3 - up from 53.2 - suggesting that manufacturers were trying to hold the line on the prices they charged for finished goods to try to remain competitive.
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