Lending sets scene for rate rise

Mortgage lending dipped last month, but other lending was buoyant. Money and credit figures published yesterday rounded off a week of statistics showing the continuing strength of the recovery and left the City sure that higher base rates are on t he way.

The feeble state of the housing market means some lenders have decided not to follow Halifax, Britain's biggest building society, in raising mortgage rates in reaction to December's half- point base rate increase. Cheltenham & Gloucester and Newbury building societies said they would hold their rates.

Net mortgage advances made by the building societies fell to £623m in December from £1.02bn. Net new commitments fell to £2.45bn from £3.18bn. Adrian Coles, director-general of the Building Societies Association, said the drop was disappointing, althoughpartly due to normal seasonal slowdown.

Net advances in 1994 were 18 per cent higher than in the previous year, but were still relatively subdued, according to the BSA. Mr Coles said: "The recovery we hoped for did not materialise. There are not enough people with enough confidence to buy houses." Much of the increase over the year had been due to remortgaging.

Lending by the big British banks for house purchase fell, too, to £647m from £746m, adjusted for seasonal variation. Total bank lending to households declined by even more, from £972m to £760m last month. Consumer borrowing from the banks nearly halved between November and December - although turnover on credit cards reached a record last month, with £117m in new borrowing.

In contrast to these setbacks, other types of lending recovered. Total loans advanced by the big British banks increased for the third month running, according to the British Bankers' Association. They rose by £1.45bn in December, compared with a recent monthly average of £979m. Tim Sweeney, director-general of the BBA, said: "There was also a strong rise in new facilities this month, which may lead to further increases in lending in the near future."

The BBA's members reported a big increase in borrowing by the financial sector, up £710m. However, their lending to manufacturers declined by £442m, with the biggest debt repayments made by motor manufacturers and "other" manufacturers. Only food, drink and tobacco companies increased their borrowing, and this was probably because of post-Budget duty payments by the tobacco and drinks companies.

Total bank and building society lending was £3.9bn in December. Deducting the building societies' and big British banks' components leaves about £1.5bn of lending by other banks - the second month in a row when their share of the grand total has been high. Foreign banks lend mainly to companies.

Mr Sweeney said: "We could be seeing the first signs of the company sector in general returning to banks for their financing." For the past two years companies have repaid debt.

Alan Davies, a Barclays Bank economist, said: "There are some early signs of a pick-up in lending to companies." The competition was coming from continental European banks.

This source of loans helped take the growth of total lending in the year to December to 4.5 per cent, up from 4.4 per cent in November and far lower rates earlier in the year. The clear signs that lending is speeding up left City analysts even more convinced of the need for another rise in base rates.

Adam Cole of James Capel said: "A base rate rise in early February looks like a near certainty."

This widely shared view, along with a second day of weakness on Wall Street, hit share prices.

The FT-SE 100 index fell 33.6 points to 2,995, its first foray below the 3,000 level for five weeks. The expectation of higher US interest rates, along with worries about Mexico and Canada, pulled US shares lower.

Outlook, page 17

Lenders divided, page 19