New evidence of housing slowdown as Bank moves to cut loan rates 'aggressively'

Mortgage lending last month was £30.7 billion, the Council of Mortgage Lenders (CML) said, down 8% from £33.2 billion for the same period last year.

The annual drop is the first time that monthly lending levels have dropped below the same month in the previous year since July 2005, the CML said.

CML director general Michael Coogan said he expected the trend to continue into next year, and blamed it mainly on the credit crunh. He called for more support from the central banks to help increase bank liquidity.

News of the mortgage slump comes as the Bank of England says it may have to slash interest rates "aggressively" next year to prevent the economy from plunging into recession.

It admitted it had been taken aback by the scale of the housing market downturn and said there is a risk of a "severe reduction" in the availability of credit to families.

As a result, it said "substantial" interest rate reductions may be needed as the economy's fortunes dive.

The warning came in the formal minutes of the Bank's latest rate-setting meeting, when it cut borrowing costs by a quarter-point to 5.5 per cent.

Economists said it is unusual for the Bank to be so forthright about the need for further reductions, but the comments will provide hope to homeowners that lower borrowing costs are on the way.

Yesterday the Royal Institution of Chartered Surveyors said 123 families a day could have their homes repossessed by their banks in 2008 - a rise of 50 per cent on this year's figure.

In a separate development, Chancellor Alistair Darling told the Daily Mail that Britain faces "uncertain testing times" as the world credit crunch deepens.

He warned he is planning a painful squeeze on public spending, which will only add to the headwinds facing the economy.

The promise of more Bank of England rate cuts will bring some relief to households who have built up a record £ 1.3trillion debt mountain.

However, many banks are dragging their feet on passing on the latest rate reduction to customers.

Adding to the pain, the Financial Services Authority yesterday urged lenders to hang on to more of their cash. Stricter lending criteria at major firms could further squeeze the supply of loans to consumers in the New Year.

Major banks have racked up billions of dollars of losses following the implosion of America's property market.

The Bank's minutes added: "The worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term.

"Signs of slowing growth in the industrial world were already apparent. That suggested a substantial loosening in policy might be needed."

Bank governor Mervyn King joined in the move for lower rates, which helped raise hopes the next reduction could come as soon as January.

Some economists expect the Bank to cut back rates to four per cent or lower over the coming year.

Many predicted the next move could happen as soon as January 10, the date of the Bank's next rate-setting meeting.

Morgan Stanley economists said action by the Bank is urgently needed because there is now a 35 per cent chance of an outright recession next year.

They also said the housing market could slump 10 per cent in 2008.

In a press conference with Gordon Brown yesterday, Mr Darling signalled he would support further rate cuts because inflation is less of a concern than before.

"The Bank of England's report this morning does make clear that unlike in the past it does have room to take action," he said.

But the Bank's ability to lower rates could be restricted by continued fears about inflation.

The Bank minutes warned a "large reduction" in interest rates could trigger a jump in inflation, which the Bank has to keep around two per cent.

Government sources said it is a "reasonable assumption" Mr King will win a second fiveyear term as governor next year, despite speculation that Mr Brown is looking for an alternative candidate in the wake of the Northern Rock fiasco.