Credit Crunch Hits U.K. Economy

LONDON -- British banks slashed the number of new home loans by a third in February compared to a year ago and sales of big ticket items fell sharply in March, in signs that the credit crunch impact is spreading beyond the hard-hit financial sector.

Mortgage lenders have tightened up loan terms in response to a global credit crisis that has made money more expensive on financial markets despite lower official borrowing costs.

Central banks have tried to alleviate the squeeze by pumping cash into the system under less strict terms than is normal.

But figures from the British Bankers' Association on Thursday showed those measures have done little to stop the crunch feeding into the real economy, with mortgage approvals at near-record lows last month and down by an annual 33 percent.

"In view of the credit squeeze, the accompanying tightening in mortgage lending standards, as well as fears of further house price falls, the subdued level of mortgage demand in February should be no surprise," said Seema Shah, a property economist at Capital Economics.

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"Even interest rate cuts are unlikely to have much impact on the housing market as mortgage rates are falling less quickly than base rates."

The Bank of England is widely expected to trim interest rates by 25 basis points to 5 percent in April or May and Governor Mervyn King indicated on Wednesday that the credit crunch had left policymakers more predisposed to cutting rates.

BANKS TIGHTEN UP

But commercial banks still appear reluctant to lend to each other, worried over what toxic debt may be lurking on balance sheets in light of the U.S. subprime mortgage crisis.

The interbank cost of borrowing three-month sterling funds rose again on Thursday, nudging above 6 percent to hit its highest level this year.

King told parliament's Treasury Select Committee on Wednesday that mortgage rates were roughly the same as last August -- before the BoE started to ease monetary policy and when official rates were 5.75 percent.

However, King said he wants to see a stabilization in house price inflation and expects the cost of a home to remain broadly flat for the next couple of years.

Many economists expect weaker demand to drive house prices down by about 5 percent this year as fewer buyers find houses -- and mortgage rates -- they can afford.

There are also signs that fears over the future of the economy in the wake of the credit crunch are cooling the British appetite for splashing cash in the shops.

Retail sales growth was broadly steady in March but shop owners expect sales to fall next month, according to a survey from Britain's leading business lobby group the Confederation of British Industry.

Durable goods sales posted their fifth straight monthly fall to record the weakest performance since October 2005.

"We think that the combination of the sharp slowdown in house price inflation, past rises in interest rates, tighter credit conditions and rising inflation is hitting consumers hard," said Nick Kounis, a senior economist at Fortis.

However, business investment rose sharply in the final three months of 2007, according to an upwardly revised estimate from the Office for National Statistics, suggesting businesses were still feeling confident enough to boost spending late last year.

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