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Credit for the MPC

13 July 2016 by Gary Kirk

This morning the Bank of England released its latest Credit Conditions Survey, the contents of which are based on a survey of bank and building society lenders. The survey considers secured and unsecured lending to UK households, small businesses and non-financial corporations over the 2nd quarter of 2016 and the projections for the following 3 months. The fact that the UK referendum sits in the middle of this review makes it even more interesting than normal, even though the survey itself was conducted between 23 May and 10 June.

To us the CCS is always worth a read as it does give an interesting insight into the real credit transmission for the country, and thereby offers some indications on how the MPC may be swayed in their train of thought about the health of the real grass-roots part of the economy. With the MPC meeting tomorrow this survey takes on even more relevance.

In the Q1 survey the BoE reported that supply of secured credit to households decreased slightly while unsecured lending increased. However, the demand for house purchases increased and spreads on mortgage rates widened when compared to the underlying swap rate. For small businesses the demand fell slightly in Q1 but was expected to pick up in Q2; the spread on the loans for medium-sized businesses actually decreased over the first 3 months of the year, helped by a general decrease in the default rate.

The key issues in today’s survey show that secured credit to households (consumers) decreased slightly in the 2nd quarter, despite unchanged expectations in the previous survey and despite lenders claiming an increased willingness to lend (for those borrowers with home equity of less than 10%). What is interesting is that demand for secured lending for house purchases significantly increased in Q2 (despite a small decrease in supply), with lenders expecting this demand to increase further in Q3; the exception being the decrease in the buy-to-let sector (due to tax changes). Could this mis-match in supply and demand be due to more borrowers failing to meet the new ability to pay criteria that was introduced last year?

However, lenders reported the availability of unsecured lending increased in Q2 as credit scoring criteria eased. Availability of credit to the corporate sector was unchanged but availability of credit to the commercial real estate sector decreased (i.e. the press headlines of this being due to the Brexit result may have been a bit stretched). For us however the key statistic was the sharp decline in demand for lending to larger corporates, which is the 4th quarter in a row that demand has fallen. Once again the UK referendum may amplify this lack of demand but the trend was already in place. Spreads on loans across all business sectors and default rates were unchanged to slightly better. Demand for smaller businesses was up (although availability of supply was unchanged).

In conclusion this report does nothing to change our mind that the BoE are incentivised to cut rates tomorrow by 0.25%, although this is unlikely to help loosen the tighter credit scoring criteria for secured lending. We think it is too early to introduce other stimuli into the economy, such as QE, but should there be any further evidence of a stalling in the transmission mechanism or other parts of the economy then we wouldn’t rule this out later in summer/autumn.

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