RTTNews - Mortgage lending in the UK showed the smallest monthly increase on record, a report from the Bank of England showed Monday.

The net lending secured on dwellings grew GBP 0.3 billion month-on-month in May, slower than the increase of GBP 0.9 billion in April and the six-month average increase of GBP 1.1 billion. Economists expected the lending to increase by GBP 1 billion. The rise in net lending in May is the slowest since the series began in 1993.

At the same time, the number of loans approved were 43,414 in May, higher than the 43,191 in April. Economists expected the number to come in at 47,000.

On an annual basis, the net lending grew 1.3% in May, slower than a 1.5% rise in the previous month.

Andrew Goodwin, an economist at the Ernst & Young ITEM Club meanwhile noted that, Progress in restarting bank lending is proving to be painfully slow. The persistent problems that both consumers and businesses face in accessing credit have the potential to choke off the recovery before it has really begun.

Meanwhile, consumer credit rose 2.3% year-on-year in May, slower than a 2.8% rise in the previous month. On a monthly basis however, the growth remained unchanged at 0.1%.

According to Goodwin, the weakness of consumer credit provides further evidence that the consumer is in no mood to drive the recovery. We are likely to see an improvement in the GDP data in the short-term as the stock cycle turns, but are increasingly concerned that final demand remains too weak to sustain any sort of recovery once the initial boost has worn off.

Elsewhere, a report released by the Building Societies Association showed that mortgage approvals were valued GBP 1.6 billion in May, higher than the GBP1.59 billion in April. However, the value of approvals were 35% lower than those made in the previous year.

While the mortgage market appears to have recovered slightly from the start of the year, levels of activity remain depressed, Adrian Cole, Director of the BSA said.

Including interest credited, savings balances held by building societies decreased by GBP106 million in May this year compared to a GBP1. 162 billion increase last year. There is evidence that households are looking to repay debt rather than save, and it is possible that there will be a net withdrawal, before interest credited, from the total UK savings market in 2009, the BSA said.

Cole said competition for retail deposits remain intense. However, those banks that are supported by the State are able to compete unfairly for retail deposits, and steps need to be taken to ensure that Government backing for some institutions does not distort competition for savings.

During the month, building societies had a had a net withdrawal of GBP 494 million, compared to net receipt of GBP 855 million last year.

House prices remained flat in June from the previous month, after easing for 20 months, while it declined 8.7% from the previous year, the Hometrack reported earlier on Monday. The survey noted that the number of new buyers has increased 36% since the beginning of the year, while properties coming up for sale have risen just 6.4%.

Highlighting the problems of banks, a report released by the Bank of England on Friday showed that while the funding conditions in the UK have improved slightly, banks continued to remain vulnerable to economic shocks.

The BoE said if economic recovery were to stall as a result of weak bank lending, losses on assets could rise, further affecting confidence in the banking sector. The BoE said a number of strict regulations were required for banks, among which was the frequent disclosure by the banks to control risk taking.

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