Banks and mortgage lending plummet to 10-year lows

Figures from the Bank of England showed that lending to firms last year hit its lowest level since records began in 1999 and remained weak early this year.

A separate survey by the Council of Mortgage Lenders showed the amount of money extended to homebuyers also plummeted to a decade-long low in January.

The shocking fall in lending, a direct result of the financial crisis and recession, heightened concerns about the sustainability of the economic recovery in Britain.

Economic output grew by just 0.1% in the last quarter of 2009 as the UK limped out of the deepest recession since the Second World War.

Banks have been criticised for starving businesses and households of the funds that are required to drive the recovery.

Jonathan Loynes, UK economist at Capital Economics, said the fall in lending was in part being driven by weak demand for loans as businesses and households borrow less and repay debts.

But he added: "It also reflects constraints on the supply of lending and this is a potential obstacle to the economic recovery.

"Credit and lending is the lifeblood of the economy particularly as it comes out of recession."

The Bank said lending to firms fell by £4.3 billion in December after an increase of just £100 million in November.

It meant the flow of funds to businesses dropped 8.1% last year, the worst figure since records began.

The Bank said that lending "remained weak" in January.

CML figures showed the mortgage lending declined to £9.1 billion last month — a 32% fall from December, a 21% fall from January 2009, and the lowest monthly total since February 2000.

It came as demand for housing was hit by the end of the Government's stamp duty break.

There is typically a fall-off in mortgage lending during January as househunters put moving plans on hold over Christmas.

But this year's drop was larger than usual as househunters rushed to buy lower-value properties before the stamp duty holiday ended at the beginning of the year.

CML economist Paul Samter said: "We remain in a period of uncertainty for the housing market and economy at large.

"The market continues to move broadly in line with expectations.

"However, we will likely see little underlying improvement this side of the election and then only a slow drawn-out recovery.

"There remain a number of headwinds slowing the recovery. Funding conditions, while improved, will remain challenging."

The stamp duty threshold dropped back to £125,000 on 1 January, prompting a rush on mortgage approvals and completed home sales in the final months of 2009.

The government concession, which had temporarily pushed the threshold up to £175,000 for just over a year, had been aimed at halting the rapid slump in the property market.