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Reduced lending by banks affecting recovery

Senior bankers claimed that recession-hit consumers and businesses had reduced borrowing

The Bank of England has warned that lenders were holding back the economic recovery by restricting credit to households and businesses, countering the banks' claims that lack of demand was the primary reason for their poor lending figures.

In its latest Quarterly Bulletin, the Bank of England pointed out that lenders themselves were to blame for reducing the supply of new loans, mortgages and other types of credit, which was threatening to jeopardise the country's economic recovery.

Senior bankers had claimed that recession-hit consumers and businesses had reduced borrowing, which was being reflected in the weaker lending patterns during the recession and its aftermath.

However, the report has revealed that the credit shortage had allowed banks to increase the profits they made on loans by increasing the rates of interest.

"Overall, the evidence suggests that the cost of credit rose sharply during the financial crisis, and that there was a reduction in the availability of credit, both for households and companies. It is likely that tight credit supply played a role in driving up the cost of credit," the Bank of England said.

Reduced access to borrowing had compelled 22 per cent of households to cut spending this year, compared with 17 per cent last year and about 10 per cent in 2007, the bank noted with concern.

"Weak lending is more likely to dampen the recovery in activity. For example, an increase in the cost of credit would push down investment spending," the BoE further noted.