Banks 'to reduce lending further'

Bank of England says banks are making further lending cuts

Britain's banks and building societies are set to make even more cutbacks in their lending, according to a Bank of England report.

The report also said that with economic conditions worsening, more borrowers are expected to default on their loans.

The gloomy report is likely to raise hopes of a cut in UK interest rates - currently at 5% - next week.

The Bank said there had also been a bigger-than-expected fall in new mortgages over the past three months.

The Bank of England's quarterly credit conditions survey confirmed that lending by commercial banks has already fallen steeply since the start of the credit crunch.

In its report, the Bank asked lenders about the past three months - and their predictions for the final three months of 2008.

Cautious approach

Commercial banks told Britain's central bank they were expecting to further tighten the availability of credit for companies and home-buyers during the final three months of the year.

In its report, the Bank said: "Lenders reported that the changing economic outlook, their expectations for the housing market, and changes in their appetite for risk had contributed to the decline in credit availability."

George Buckley, an economist at Deutsche Bank, said: "This is precisely what we would have expected, it reinforces the fact the housing market still has a lot further to weaken yet."

Earlier on Thursday, the Nationwide, one of Britain's biggest mortgage lenders, reported a 1.7% fall in house prices in September, taking the annual rate of decline to 12.4% - the sharpest drop in 17 years.

Central banks have been pumping cash into the money markets to try to encourage banks to lend to each other - and so make it easier for them to lend to consumers and companies.

However, interbank lending rates have remained stubbornly high amid bank failures and falling asset prices.

The Bank of England carried out its survey of commercial banks between 26 August and 17 September.