Bank of England pressured for new rate cuts as credit crunch hits families

The Bank of England was last night under pressure to cut interest rates next week as evidence showed the global credit crunch is inflicting real pain on British families.

A study by the Bank revealed a sharp rise in the number of people being turned down for mortgages, loans and credit cards.

It said British banks and finance companies have responded to global financial turmoil by imposing strict caps on lending.

This is choking the spending power of millions of people and threatening a serious economic slowdown and rising home repossessions and bankruptcies, it warned.

City analysts believe only drastic cuts in the Bank of England base rate, which could see it fall from 5.5 per cent to four per cent by Christmas, will head off a recession.

The bank's Monetary Policy Committee will meet to decide on any rate changes next week.

The study showed the amount of money available through home loans 'reduced materially' in the final three months of 2007.

Lenders have axed hundreds of cheap home loans and are turning away customers seeking mortgages.

Recent studies show two in five people applying for credit cards are being rejected, while one in five loan applicants are being turned down.

The bank's Credit Conditions Report identifies a dramatic shift in lending patterns.

A third of lenders think the availability of secured credit has become worse within three months, while a quarter expect things to deteriorate.

The decision to cap lending can be traced to the U.S. and the collapse of many risky mortgages in 2007.

The fallout has left global banks with multi-billion-pound losses and unwilling to lend to one another. It has also put up the cost of borrowing cash on international markets.

They have tightened lending rules to ensure they reject more consumers who are considered a risk and have reduced the scale of the loans they are prepared to offer home buyers, meaning people must have bigger deposits.

It is also clear that lenders have increased their interest rates and charges on many mortgages to boost profit margins - or spreads.

Some have introduced a "get tough" policy on those who fall behind on payments.

Lenders are concerned about the changing economic outlook, particularly after Northern Rock was at the centre of the first run on a British bank in more than 100 years.

They are also bracing themselves European economist at Global Insight, said: "Lending to households has tightened and become more expensive.

"Furthermore, the availability of credit for households was expected to diminish further over the first quarter of 2008, which will add to the growing downward pressures on consumer spending."

He said the significant tightening in credit conditions increased the pressure on the Bank of England to reduce interest rates again "sooner rather than later".

Bob Pannell, of the Council of Mortgage Lenders, said: "This survey corroborates other evidence of worsening market sentiment.

"This may increase the chances of interest rate cuts sooner rather than later if inflation remains subdued."

Tory Treasury spokesman Philip Hammond said: "This report suggests 2008 is going to be a difficult year. The credit crunch is squeezing businesses and hard-pressed families across Britain.

"Gordon Brown has failed to prepare the country if instability lies ahead. He borrowed in a boom and has little room for manoeuvre now things are getting tougher."