ROOF Blog

The credit crunch is showing signs of easing today, as the Bank of England revealed that lenders expect to make more loans available in the coming months. The bank’s latest research suggests that policy measures to boost lending are starting to have a beneficial impact, and other moves – such as quantitative easing – are expected to further boost credit availability.

Homeowners are taking advantage of falling house prices and lower interest rates and paying off their mortgages, Bank of England figures show. During the fourth quarter of 2008 Britons reduced their mortgage debt by £8 billion. The amount of equity people withdrew from their homes was negative for the third quarter running, as they made the biggest net injection of equity since records began in 1970. For the same period last year, borrowers unlocked £6.7 billion from their properties.

A senior Treasury spokesperson yesterday admitted that it dealt with the failure of banks such as Northern Rock and Bradford & Bingley in a way that was ‘excessively leisurely’, but added that the Bank of England had also been slow to act. Nick Macpherson, permanent secretary to the Treasury, told a House of Commons public accounts committee, that ministers will be asked to consider an inquiry into the role of the Financial Services Authority.

Mortgage approvals increased by 19 per cent during February, according to Bank of England figures. There were 38,000 approvals in the month, up from 32,000 in January, which surprised pundits, giving them hope that low interest rates and falling house prices may be encouraging buyers back to the market. Consumers are growing uneasy about the outlook for the economy, however, as last month saw also the biggest repayment of consumer debt since records began in April 1993, with consumers repaying £245 million more than they borrowed.

It seems that the prime minister has lost the battle of the Budget, as he signalled that Britain would not be announcing nor pushing for a fiscal stimulus, after the failure of a gilt auction underscored concerns about the impact of further borrowing. The rift appears to have been healed between Mr Brown who has consistently backed a global stimulus plan, and Alistair Darling and bank of England governor Mervyn King who said there wasn’t enough money for a second wave of tax cuts of public spending.

Tensions between the Prime Minister, Bank of England and Treasury are bubbling away. Bank governor Mervyn King sided with the chancellor yesterday as he appeared before a Treasury select committee and warned Gordon Brown that the UK could not afford a second economic stimulus package. Meanwhile Mr Brown told European MEPs in Strasbourg that the EU had to take the lead in rehabilitating the world economy and before next week’s meeting of G20 leaders is calling for them to bring forward fiscal stimulus packages to back the world’s economies.

The Financial Services Authority (FSA) is putting forward new rules on lending and to prevent banks taking excessive risks. Chairman of the FSA Lord Turner wants banks to publish more and clearer information in their accounts about the risks they are taking, while a pan-European body has been proposed to set standards for other regulators to follow. A shake-up in the relationship between the FSA, Bank of England and the Treasury is also set to be proposed.

Meanwhile, the Bank of England today will start pumping in to the economy newly created money, as it buys £2 billion in gilts in an effort to boost the economy. The bank said it would initially pump £75 billion into the economy via twice-weekly auctions, but has permission to create another £75 billion if it needs to. Governor of the bank, Mervyn King, said the bank will do this until the lending markets become ‘unglued’ again. It is the first time the UK’s central bank has used the policy. A somewhat tongue in cheek petition has also started to rename the term ‘quantitative easing’ with ‘queasing’.

Almost 200,000 vulnerable families and pensioners were underpaid mortgage benefits worth up to £11 a week because of a computer blunder it has emerged. More than 120,000 pensioners claiming pension credit missed out on £11 a week and 80,000 people on income support were underpaid by £7 a week, for at least two months. The payments would normally track the Bank of England base rate, however, the chancellor had previously standardised support at a set rate.

Governor of the Bank of England Mervyn King said that interest rates will fall no further, and promised that the £75 billion quantitative easing would trigger a recovery and beat the recession. Talking to Sky News after the Bank yesterday dropped interest rates to their lowest ever rate of 0.5 per cent, King said he did not know when the measures would work precisely, but eventually they would.