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Credit Conditions Survey

17 October 2016 by Mark Holman

Friday’s release of the Bank of England’s Credit Conditions Survey was eagerly awaited as it gave us the first real insight to lending conditions post the Brexit referendum. The survey was conducted between August 23rd and September 14th and covers the UK’s 7 largest lenders. As usual it looks at the supply of credit, the demand for credit, the pricing of credit and also the default rate. This is done across secured lending, unsecured lending and corporate lending.

Overall it reports a slight tightening of conditions, and that is despite the very bold actions from the Bank of England. Some results were clearly to be expected, for example in secured lending to households (i.e. mortgages) where demand fell very sharply indeed, particularly in the Buy-to-Let sector which registered its biggest drop since the survey began in 2007. Demand for credit from the corporate sector also decreased significantly presumably as businesses reacted cautiously to the referendum result. The better news is that lenders expect demand in both of these sectors to pick up in Q4.

Interestingly though, on the supply side, credit to commercial real estate sectors was unchanged, despite dropping in Q2. One might have expected this to continue to decline.

However, we save the most important point until last: consumer unsecured lending growth has been very strong over recent quarters with the banks continually willing to facilitate this growth through supply and attractively priced loans. In Q3, demand grew less aggressively, which is to be expected, but the banks continued to facilitate the lending with loosening credit criteria. We think this may be about to take a breather as the default rate in this sector spiked higher, especially outside the credit card sector. Excluding credit cards, the jump in defaults was the highest since 2009. While this may be a one-off aberration, banks can be expected to react with tighter credit conditions, lower volumes and higher pricing. This is a potential important tightening, although it may only be temporary, the default rate will guide that.

What can we read into this? Well not too much at this stage as its only one quarter, but it could be poor for retail sales in the all-important 4th quarter, especially with potential upward pressure on prices from the falling £.

Overall though, the modest tightening of conditions was to be expected, which is exactly why Mr. Carney had to strike pre-emptively, and why he may have to continue to use his extraordinary toolkit.

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