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Demands grow for urgent interest rates cut as families face Christmas credit squeeze


By Daily Mail Reporter

Last updated at 1:03 PM on 02nd October 2008





  • Credit squeeze to tighten in run-up to Christmas

  • Bank of England under pressure to cut rates next week
  • House prices in record fall last month
  • Million more people choosing between food and fuel

British families are facing a lean Christmas after banks warned they will be forced to lend even less in the next three months because of the economic crisis.

The Bank of England was facing growing demands for a significant interest rate cut next week after its own findings showed the credit squeeze is set to get even worse.

Its Credit Conditions Survey showed banks slashed their lending to house-hunters and businesses more than they expected in the past three months.

They plan to lend even less in the final part of the year because of growing fears about the slowdown and plunging property prices, according to the key report.

Marks & Spencer chairman Sir Stuart Rose was the first to openly call for a rates cut today after the retail giant revealed a 6.1 per cent slump in sales.


article-1066508-022F63B2000004B0-909_468x311.jpg Lean Christmas: Homes are in for a tough holiday season after banks warned the credit squeeze will get even tighter in the next three months

He said a cut at next Thursday's policy meeting would be 'enormously helpful' in boosting confidence battered by the recent financial turmoil.

'It would be a brave person to say we are at the bottom ... there is a lot of uncertainty about,' he said.

'People are worried about where their money is and the security of their savings and that is bound to have some spill-over effect into consumer confidence.'






Financial institutions have already been giving out far less money since the credit crunch first struck, determined to hoard cash to keep themselves afloat.

Plummeting house prices and the general economic downturn has made them far more wary about taking risks on mortgage advances and other loans.


article-1066508-024412E100000578-995_233x385.jpg Struggle: Banks say they will lend even less in the next three months


New figures from Nationwide published today showing house prices slumped by their biggest ever margin last month will do little to ease their fears.

Separate official figures show a million extra families are having to choose between heating their homes or eating this year compared to 2006 because of soaring bills.

The Bank of England survey was done between August 26 and September 17, before the financial turbulence of the past fortnight, meaning the situation will have already deteriorated further.

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: 'Reduced credit availability will put pressure on already stretched households. Mortgage credit supply has fallen yet again but equally worrying is the drop in demand. We are seeing a vicious circle of diminishing consumer confidence and falling house prices.'

The Bank of England report was published ahead of Gordon Brown travelling to Paris this weekend to discuss the economic crisis with EU leaders.

The ominous results will pile the pressure on the Monetary Police Committee and encourage them to cut rates for the first time in six months next week.


Analysts are hoping for a quarter point cut back to 4.75 per cent. A record plunge in manufacturing output last month has also added to the call for rates to go down.


As the slowdown takes its toll, lenders told the Bank of England there were more people and businesses defaulting on their loans - a trend they expected to continue.

The survey showed almost half, 44.8 per cent of lenders, had seen rising defaults by households and more than a third, 36 per cent had businesses in arrears.

Banks said they had tightened their criteria for mortgages and slashed the maximum they would lend compared to the value of the property.

Meanwhile, the number of people seeking a mortgage had dropped off sharply with 69.1 per cent of all lenders reporting a plunge in demand.


In a sign of the financial turmoil, banks said there had been far less call for credit for capital investment, mergers and acquisitions and in commercial real estate.

And more businesses asked instead for loans to restructure their balance sheets.


Paul Dales, UK economist at Capital Economics, said: 'It is no surprise that the Bank of England's third quarter credit conditions survey shows that the availability of credit to households and firms has fallen further. And it's only going to get worse from here.'

He added: 'Even if the problems in the financial markets were miraculously solved overnight, which is unlikely, the impact of the credit crisis on the real economy will be with us for some time.'

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