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Rate cut pressure builds as Bank fears defaults
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Posted by: forwardone
Rate cut pressure builds as Bank fears defaults
The Bank of England says credit markets will tighten further, adding more pressure for a rate cut next week
Households and businesses will find it even harder to borrow money in the next three months as credit conditions tighten in the wake of the turmoil across global financial markets, according to a survey from the Bank of England.
The Bank's quarterly credit conditions survey found that the amount of secured bank lending to households had been "materially reduced" in the three months to mid-December, while corporate credit availability also fell as the effects of the credit crunch continued to take hold.
The survey also showed that mortgage defaults were likely to rise in the next three months, adding to mounting evidence that the housing market is quickly cooling.
The findings will put pressure on the Bank to further reduce interest rates after the quarter percentage rate cut, to 5.5 per cent, in December. It was the first cut in two years.
Analysts Global Insight said: "The significant tightening of credit conditions for both households and corporates in the fourth quarter of 2007, and the expected continuation of these trends in the first quarter of 2008, increases pressure on the Bank of England to trim interest rates again sooner rather than later."
The Bank could cut rates to 5.25 per cent as soon as next Thursday, Global Insight said, adding it that it expected a move by February at the latest. It said it believed interest rates would be lowered to 4.75 per cent by the third quarter.
The news of tightening credit conditions comes as several retailers have warned of a slowdown in spending. Earlier today, DSG International, which owns PC World and Curry's, said its full year profits would come in below expectations after dire Christmas sales. And Next, the high street retailer, gave a gloomy forecast for 2008 as it reported flat sales for the six months to December 24.
Banks have tightened their lending criteria in the wake of this summer's credit crunch as inter-bank lending rates have soared. Default rates on loans to medium-sized corporates rose over the past three months but default rates of large businesses remained unchanged, the Bank's survey found.
The fourth quarter survey was conducted between November 19 and December 12. Contrary to their expectations in the third quarter survey, lenders reported a material reduction in the amount of money they were prepared to lend households in the fourth quarter.
"This reduction in secured credit availability was associated with lenders reducing their risk appetite and targeting a slightly lower market share...though lenders' concerns about the macroeconomic outlook, including the housing market, were also important considerations," the Bank of England said.
Capital Economics, the analyst group, said: "The Bank of England’s survey....confirms that the supply of credit has been tightened significantly for both households and firms. The news was especially bad for the housing market. These developments are expected to continue this quarter, supporting our forecast of house price falls in 2008."
Timesonline