Households and companies are likely to find it harder to borrow in the coming months after money market turmoil tightened credit conditions at the end of last year, a survey from the Bank of England showed on Thursday.
The survey also showed mortgage defaults were likely to rise in the next three months and demand for secured credit was expected to fall.
Policymakers are concerned about the impact of the recent credit squeeze and the findings are likely to bolster the case for further interest rate cuts to shore up the economy.
The Bank of England cut interest rates to 5.5 per cent last month -- the first cut in two years -- and investors are betting rates will fall to 5 per cent by the middle of this year.
"An undoubtedly weak survey, albeit expected," said George Buckley, chief UK economist at Deutsche Bank.
The Bank's fourth-quarter survey was conducted between November 19 and December 12 so would have taken account the sharp rise in money market rates at the start of last month.
Default rates on loans to medium-sized corporates rose in the fourth quarter while those on loans to large companies, which have better access to capital markets, were little changed.
The survey showed lenders were concerned about the level of risk exposure and the outlook for the broader economy.
"This partly reflected further reductions in risk appetite and market share objectives, though lenders' concerns about the macroeconomic outlook, including the housing market, were also important considerations," the survey said.
Analysts said tighter credit conditions were likely to weigh on consumer spending and the broader economy going forward.
"The survey confirms that the supply of credit have been tightened significantly for both households and firms," said Vicky Redwood at Capital Economics.
"Both consumer spending and investment therefore look set to suffer." (Reuters)
UK credit conditions to tighten further