May 5, 2010 3:00 am

Mortgage approvals still flat

Lending to households and businesses proved weaker than expected in March, according to Bank of England data.

Lending to private non-financial companies (PNFCs) slipped by £400m in March, with year-on-year growth at its lowest level since the collection of the data began in 1997, said economists. Borrowing would have been even weaker except for the ability of some larger companies to raise £2.8bn in the sterling capital markets, bypassing the banks.

The banking industry has said that the fall in lending to companies reflects a drop in demand amid business uncertainty about future demand for goods and services. But some employers' groups said banks were reluctant to lend and were rationing credit through higher prices.

Meanwhile, Bank data showed that the number of loans for house purchases bounced back in March to 54,201 from 43,901 in February but remained below the level of December 2009.

Total mortgage lending in March rose by £300m but the growth rate was flat on the month and the year-on-year growth rate was 1 per cent, in line with recent months.

Richard McGuire, fixed interest strategist at RBC Capital Markets, noted that the rate of growth in total mortgage lending was well below expectations and at an eight-month low. "This underscores the continued fragility of the housing sector following the stamp duty-related bounce at the end of last year," he said.

Consumer credit rose by £300m, a one-month growth rate of 0.1 per cent.

However, several economists pointed to signs of future improvement in economic activity. Michael Saunders at Citigroup noted that the drop in lending to the corporate sector had been accompanied by a strong rise in corporate deposits. This meant that corporate cash flow was improving.

In March, deposits held by PNFCs rose by 4 per cent year on year, while the outstanding bank debts of that sector fell by 4 per cent.

"The corporate liquidity ratio - the ratio of deposits to loans - rose to 50.5 per cent in March from 50.2 per cent in February and from the low point of 45.3 per cent in November 2008," said Mr Saunders.

Moreover, the Bank's favoured measure of M4 money supply - the one it has said is the best gauge of the effectiveness of its £200bn quantitative easing programme - registered a rise of 1.1 per cent in March, the best reading since the Bank began to track the measure every month last August.

Overall M4 lending, excluding the effects of securitisations, rose by £12.1bn in March, a one-month growth rate of 0.5 per cent and a year-on-year rate of 3.3 per cent.

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