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Tight credit supply behind lower lending, says BoE

A tight credit supply rather than weak demand is the driving force behind lower lending levels, the Bank of England’s Quarterly Bulletin shows.

The Bank says that because weak bank lending reflects tight supply rather than weak demand it could affect the recovery.

The report states: “The weakness in bank lending since mid-2007 reflects a combination of tighter credit supply and weaker credit demand.

“Qualitatively, tight credit supply is likely to have been the dominant influence. For example, independently weak demand would typically be associated with lower spreads on loans, rather than higher spreads.”

It adds that spreads rose during the financial crisis and have remained high, particularly on riskier loans but even on 75% LTV mortgages.

The Bank says the reduction in products over 85% LTV is in part due to the tightening in credit conditions and in response to the unusually loose conditions immediately prior to the crisis.

It adds: “Identifying the relative contribution of tight credit supply and weak credit demand to the weakness in lending is important for monetary policy. To the extent that weak bank lending reflects tight supply rather than weak demand, then weak lending is more likely to dampen the recovery in activity.”

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