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Demands by the government for lenders to boost lending to small business and householders were ignored in the final three months of last year when the supply of credit contracted more than expected.
A Bank of England survey of banks and building societies published today also shows that lenders expect to keep cutting the loans available to companies and individuals in the coming three months, and are braced for a rise in the numbers of customers failing to make loan repayments on time.
The worsening credit conditions led economists to predict that the Bank's monetary policy committee would be more likely to cut interest rates – already at their lowest levels for 58 years – next week.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "The credit conditions' survey intensifies pressure on the Bank of England to slash interest rates further." He predicted a cut of at least 75 basis points to 1.25% next Thursday following the MPC meeting.
The government has used £37bn to buy stakes in Royal Bank of Scotland and the soon-to-be-merged Lloyds TSB and HBOS and is heaping pressure on them and other lenders to pass on rate cuts. However, Nationwide is refusing to pass on any further cuts to customers of its tracker mortgages and is setting a floor of 2%.
The Bank of England conducted its survey between 24 November and 15 December and found that lenders had been surprised by a stable demand for mortgages and remortgages. Lenders had expected demand to fall, as it did for unsecured loans.
Lenders reported that they reduced the availability of mortgages to householders because of expectations of further falls in house prices and concerns about the economic outlook.
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