Thursday, 3 January 2008
Banks turn off the tap
Easy credit is the lifeblood of any bubble. No credit, then no bubble; it is as simple as that.
Today, the Bank of England published its quarterly survey of credit conditions. Every three months, the BoE goes around and asks the commercial banks how they feel about lending out money. In the most recent survey the banks told the Bank of England they plan to make far fewer loans to consumers and companies in the first quarter of 2008.
The message from the survey is all too clear - commercial banks have had enough. They've taken a long hard look at the UK consumer and they see far too much risk. UK households have taken on too much debt and default risk has skyrocketed. The housing market can go only one way - down. Handing out mortgages on overvalued property is just plain dumb.
The recent interest rate cut hasn't done much for commercial bank sentiment. The Bank of England will need to keep cutting, but this threatens to weaken sterling, which will, in turn, generate import-related inflation.
So the Bank of England is faced with a dilemma - cut rates and generate more inflation, or leave rates alone and see the economy tank.