By Fiona Shaikh and Peter Griffiths
LONDON, March 29 (Reuters) - - Approvals for home loans in Britain fell to an 8-month low in February, and banks expect to tighten lending in the next few months, Bank of England data showed, highlighting the tough path ahead for the recovery.
The figures come after mortgage lender Nationwide said prices fell at their fastest pace in two years in March, though analysts said some of the weakness in the data may have been due to the end of a temporary tax break for first-time home buyers.
But the gloomy housing market and lending data were tempered by figures showing output in Britain's dominant services sector grew 0.2 percent in January, suggesting the economy made a firm start to 2012, having shrunk at the end of last year.
The BoE said mortgage approvals numbered 48,986 in February, well below analysts' forecasts and down from 57,899 in January. Net mortgage lending, meanwhile, eased to 1.2 billion pounds in February.
"Does this reflect something seasonal or does it reflect perhaps the imminent expiry of the stamp duty holiday for first time buyers? I think time will tell," said Peter Dixon, economist at Commerzbank. "But I do think we shouldn't be expecting the recent upward trend in the market to continue."
A weakening housing market will make hard-pressed Britons even more reluctant to spend, denting hopes for a consumer-led recovery this year. Indeed, a survey from the EU Commission showed UK consumer confidence dipped to a 3-month low in March.
Analysts said it was still too early to gauge whether the Bank of England would expand its quantitative easing programme once its 325 billion pounds of purchases were complete in May.
"On balance, we still think brighter signs in international and domestic cyclical activity ... will persuade the MPC to hold off from further easing," David Page, economist at Lloyds Bank WBM, said.
"However, if activity indicators do not improve from here and credit conditions remain tight, the MPC may yet add a further 50 billion pounds to its QE target."
One of the biggest obstacles to Britain's economic recovery is a lack of credit to companies and households, and a separate BoE survey showed the availability of bank lending had remained unchanged in the first three months of this year.
This is partly due to subdued demand, with Britons wary of borrowing at a time of economic uncertainty, high unemployment and government spending cuts. Official data this week showed that as disposable incomes have plunged, households have been squirreling away any spare cash.
But banks have also been reluctant to lend due to the higher cost of obtaining funding on wholesale markets and pressure from regulators to strengthen their balance sheets.
The BoE said that for the first time in almost two years, banks said they expected to tighten their lending criteria for home loans in the coming three months, though the availability of credit to firms would remain unchanged.
In February, meanwhile, M4 broad money supply contracted by 1.9 percent, its fastest ever rate, while the BoE's preferred gauge, M4 excluding intermediate other financial corporations, fell 0.4 percent on the month after a 1.8 percent rise in January.
"The ongoing shrinkage in the money stock provides a little more ammunition for those MPC members who are already inclined to expand QE further," said Blerina Uruci, economist at Barclays Capital.