Credit squeezing hope of recovery for UK economy

Scarce credit and fears about the cost of future borrowing may be holding back the UK’s economic recovery, monetary policy committee member Martin Weale said in a speech yesterday.

Addressing a meeting of economists in New Zealand, Weale focused on the use of economic modelling to analyse policy, without making any comments on monetary policy in the UK.

“People are more likely to be tolerant of any given level of debt if they believe that they can obtain further credit, should the need arise, than if they think they are up against a credit limit,” said Weale.

“So a fear that credit is tight itself encourages de-leveraging.”

Weale said tightening of credit and fear of tight credit has affected both firms and households. He added: “In the UK at least, this may be limiting the scope for recovery.”

Last month Weale predicted that, while the UK economy may shrink in the fourth quarter, it was likely to pick up gradually next year.

“I think there is a significant risk of a contraction in the fourth quarter, at least in the headline figures,” Weale said in an interview.

“I do expect to see a gradual improvement next year and in part that will be a consequence of the positive effects of the Funding for Lending Scheme,” he added, referring to the initiative that provides cheap funding to banks to encourage lending.

Recent figures showed banks took up £4.4 billion in funding from the Bank of England (BoE) through the scheme in the third quarter of 2012.

PERRY GOURLEY