U.K. Mortgage Approvals, Business Lending, Decline

U.K. mortgage approvals unexpectedly declined in June and business lending fell, highlighting continued strains in credit markets that may act as a drag on the recovery.

Lenders granted 57,667 home loans compared with a revised 58,071 in May, the Bank of England said today in London. Economists had forecast an increase to 59,700 from an initially reported 58,242, according to the median of 21 estimates in a Bloomberg News survey. Business lending fell by 1.3 billion pounds ($2 billion).

Britain’s economic growth accelerated in the second quarter and the Bank of England and the U.K. Treasury are trying to spur lending to cement the recovery. BOE policy makers led by Governor Mark Carney hold their monthly meeting this week as they prepare to publish a review on Aug. 7 about using forward guidance to support the economy.

“Economic growth is returning to the U.K., but today’s bank lending figures show why Mark Carney seems keen to send a message to households and businesses that they do not need to worry about an interest-rate rise anytime soon,” said Rob Wood, an economist at Berenberg Bank in London. “We are optimistic about the U.K.’s chances of continued recovery, but the data highlights the risks.”

Net mortgage lending rose 981 million pounds in June from May, according to the BOE. That number lags the approvals data by a number of months. Consumer credit increased 489 million pounds, less than the 781 million-pound jump recorded in May.

The pound rose 0.1 percent against the dollar and traded at $1.5392 as of 11:10 a.m. London time.

Mortgage Blip

Samuel Tombs, an economist at Capital Economics in London, said the drop in mortgage approvals “seems likely to represent a blip” as government programs are spurring homebuying.

“Mortgage demand should continue to recover in response to the fall in mortgage rates, the Treasury’s Help-to-Buy scheme and the strengthening recovery in the wider economy,” he said in an e-mailed note today.

Separately, U.K. property researcher Hometrack said house prices rose 0.3 percent in June from May and were up 1.3 percent from a year earlier. U.K. Business Secretary Vince Cable said yesterday there’s a risk the government’s housing measures could lead to a bubble.

Company Lending

The BOE data showed that lending to non-financial businesses fell 3.7 percent in June from a year earlier. Outstanding loans stood at 460 billion pounds, the lowest since data began in April 2011. Loans to small- and medium-sized businesses increased by 200 million pounds in June from May.

Ernst & Young’s Item Club said corporate lending will fall for a fifth year in 2013 to 422 billion pounds. This year will be the “trough,” with lending seen rising 7 percent in 2014.

“As the U.K. economy picks up speed, banks’ balance sheets will begin to strengthen again,” Item Club said in a report in London today. “However, there will be a lag before the effects become visible. U.K. banks must continue to trim their balance sheets this year in response to regulatory pressures.”

Data last week showed U.K. economic growth accelerated to 0.6 percent in the second quarter from 0.3 percent in the three months through March.

BOE policy makers will this week assess the merits of giving investors more information on the future path of policy before they publish a report on Aug. 7. They’ll leave their bond-purchase program at 375 billion pounds on Aug. 1, according to all but one of 42 economists in a Bloomberg News survey. The key interest rate will stay at a record low of 0.5 percent, a separate poll showed.

Money-Supply Data

The BOE also said M4 money supply rose 0.1 percent in June from the previous month and was up 1.5 percent from a year earlier. A separate measure of M4 money-supply growth the central bank uses to assess the effectiveness of its asset purchases accelerated to a quarterly annualized 4.7 percent in June from 4.4 percent.

Elsewhere this week, China will start a nationwide audit of government debt as the new Communist Party leadership investigates the threats to growth and the financial system from a record credit boom.

The State Council, under Premier Li Keqiang, ordered the review, the National Audit Office said yesterday. The office suspended other projects for this “urgent” work requested on July 26 and will send staff to provinces and cities this week, People’s Daily reported yesterday on its website, citing sources it didn’t identify.

Japan’s retail sales unexpectedly fell in June from May, a report today showed. Italian business confidence rose to 91.7 in July from 90.5 in June.

In the U.S., the National Association of Realtors will publish its June pending sales index of previously owned homes, while the Federal Reserve Bank of Dallas will report on Texas manufacturing activity this month.

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