Banks are finding it a struggle to raise money to provide quick loans for their customers, leading to fears of an additional credit crunch gripping the UK.
The slowdown in the worldwide economy and the eurozone credit crisis has led to British lenders having less access to funds to provide small loans to households and businesses, the Bank of England recently said. The BoE also said that even though the household finance squeeze may be ending, the UK has a 33 per cent chance of falling back into a recession – yet more people than ever are running into finance problems, with the result that they need to turn to instant short term loans to make ends meet more often than not.
The British economy will most likely be broadly flat up to about the middle of 2012, Governor Sir Mervyn King said, as the BoE pared back its inflation and growth forecasts. Dwindling growth is a threat to the Chancellor’s plans to cut the record deficit piled up by years of spending and borrowing under the Labour government, and it also puts George Osborne under pressure to produce more comprehensive plans to revitalise economic growth in the end of the month Autumn Statement.
The BoE’s most recent inflation report found that lenders in the UK have found it harder and harder to raise capital in the wake of the escalating eurozone debt crisis. One important funding measure – the cost of making sure UK banks were insured against default – underwent a significant rise in both August and September to higher than it was just before Lehman Brothers’ crash.
The report issued a warning that if the British banking systems continues to operate under such strains, businesses and households will be hit hard as lenders scale back lending and pass on the higher costs in securing funds to prospective borrowers, which would result in chaos erupting in the UK housing market and strand millions of already capital-starved small businesses with no way to stave off collapse.