Setback as figures reveal biggest fall in business lending this year

Bank of England figures showed that net lending dropped nearly £3bn after a £545m contraction in March, and was four per cent down on the year.

The figures dealt a blow to hopes that investment might spur growth.

Mortgage approvals rose by less than expected to 53,710 in April, their highest level since January but below the 54,500 forecast by economists in a Reuters poll.

The Bank has been trying to bolster credit growth to support Britain’s recovery via its Funding for Lending Scheme, which offers banks cheap credit if they maintain or increase lending to households and businesses.

It has succeeded in lowering banks’ finance costs and reducing the cost of mortgages since its launch in August, but its impact on business lending has been less visible to date, and last month the Bank tweaked its terms and conditions to increase incentives to lend to small firms.

Yesterday’s figures showed the need for this, with lending to smaller businesses shrinking by £660m after a £115m fall the month before, again the biggest drop since December.

“It’s a disappointing set of numbers,” said Societe Generale economist Brian Hilliard.

“The problem getting credit to small and medium-sized enterprises seems to be pretty intractable, and it be may be more of a demand-side issue than a supply-side one.”

Net mortgage lending, which lags approvals, rose by a strong £875m, well above expectations and its highest since December.

Mortgage lender Nationwide said on Thursday that house prices were rising at their fastest annual rate in 18 months, in part due to a boost from the Funding for Lending Scheme launched by the Bank in August.

Unsecured lending to consumers rose by £524m, above expectations.

Earlier yesterday, market research company GfK reported that consumer sentiment rose to a six-month high in May, though it still remains in the doldrums by historic standards.

The Bank’s preferred gauge of money supply, M4 excluding intermediate other financial corporations, rose at an annual growth rate of 4.8 per cent.

Britain’s economy is in a state of fragile recovery after contracting for much of 2012, and earlier yesterday the British Chambers of Commerce raised its growth forecasts for the first time since the financial crisis.