The £9.4 billion reduction to £17.5 billion in net borrowing from the Bank of England during the first half is consistent with projections made here in March (see Northern Rock: BoE payback could occur sooner than expected ) and reflects the huge scale of mortgage repayments by Rock’s borrowers.

During the first half of 2007, Rock accounted for £10 billion of the £54 billion increase in UK net residential mortgage lending. During the first half of this year, UK lending slumped to £30 billion, while Rock borrowers repaid £13 billion. In other words, Rock’s U-turn accounts for £23 billion of the £24 billion fall in UK-wide lending between the first halves of 2007 and 2008.

Rock’s rapid shrinkage has exacerbated the wider mortgage market squeeze, with negative macroeconomic implications. (See Northern Rock: should Sandler slow down?)

Barring a change in policy, Rock’s loan (to be switched to the Treasury from the Bank of England) should continue to fall rapidly during the second half, ending the year well below £10 billion. Mortgage repayments should remain high: documentation on loans within the Granite pool suggests the number of fixed-rate agreements expiring during the second half will be similar to the first six months. Retail deposit inflows should slow but Rock may repay less non-official wholesale borrowing than in the first half.

With the Treasury planning to swap £3 billion of the Bank of England debt for equity, the loan portion of the outstanding balance could be down to £5 billion by year-end.

The transfer of the Rock loan from the Bank of England to the Treasury will have an initial negative impact on the money supply, to the extent that additional gilts issued to finance the transfer are purchased by the UK non-bank private sector, with payment made from existing bank or building society deposits. A £17.5 billion reduction in such deposits would cut broad money M4 by 1.0%.