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UK faces big credit shortage

City A.M. Reporter
UK households and companies face a more severe credit shortage this year and next than their American and European counterparts, hampering economic recovery, the International Monetary Fund (IMF) said yesterday.<br /><br />Interest rates charged by banks will have to rise or another means of rationing credit be found unless the Bank of England continues to boost the supply of credit to the economy, the IMF said in its half-yearly Global Financial Stability Report.<br /><br />&ldquo;The United Kingdom appears most susceptible to credit constraints ... given its significant reliance on the banking channel and the projected sharp decline in domestic bank balance sheets, as well as substantial public financing needs,&rdquo; the report said.<br /><br />Over this year and next, Britain faces a credit shortfall of &pound;430bn, equivalent to 15 per cent of GDP -- compared to 2.4 per cent of GDP in the US and 3 per cent in the euro zone, the IMF forecast.<br /><br />&ldquo;The reason why in the UK there is this tension is because, in spite of the fact that private sector demand for credit has come down significantly... most of the credit is provided through banks, and banks are deleveraging very rapidly,&rdquo; said senior IMF official Jose Vinals.<br /><br />&ldquo;Either there is continuing support on the part of the authorities to underpin the credit process or there would be high lending interest rates or credit would be constrained,&rdquo; added the IMF&rsquo;s Vinals.<br /><br />The BoE has already committed to &pound;175bn of asset purchases -- mostly of British government debt -- to lower financing costs across the economy. Businesses say they are still struggling to get credit, though, and there have been doubts about the scheme.