Banks to cut lending and raise rates, BoE survey shows

UK banks and other lenders expect to make fewer loans at higher rates and for defaults to increase as the Covid-19 crisis damages the economy, a Bank of England survey showed.

Household secured and unsecured credit shrank in the second quarter, which ended in May, and are expected to contract further in the third quarter, according to the BoE's credit conditions survey.

Demand for household lending also shrank in the second quarter but is expected to increase, suggesting lenders will rein in lending just as people need it. The cost of secured lending rose and will continue to do so. Unsecured lending spreads were unchanged and will remain so but the length of interest-free credit card offers shrank and will reduce further.

Corporate credit availability increased in the second quarter, supported by the government's backing for business loans, and will increase only slightly, the survey showed.

Defaults are expected to increase on secured and unsecured household loans and corporate loans. A City working group warned on Thursday that small and medium enterprises were carrying £35bn of unsustainable debt built up during the Covid-19 crisis. The government is also withdrawing support for workers' wages, leaving many economists warning of a potential surge in unemployment.

Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said: "In the three months to May, worried banks tightened their lending criteria. It became much more difficult to get a mortgage with a small deposit, credit card companies slashed credit limits, and interest-free periods shrank.

"It goes to show just how worried banks are about the state of the economy, and what could happen to jobs and house prices. Lending will be even harder to come by and the end of lockdown means demand is going to rebound. So more people are going to be left struggling to find the lending they need."