The head of the Bank of England provide a smal chink of hope amid the economic gloom when he said the credit crunch appeared to finally be showing signs of improving.

The Governor, Mervyn King, said that the financial system was witnessign improved liquidity and confirmed that mortgage rates were beginning to come down as the logjam in wholesale money markets freed-up.

But it is only those less risky borrowers with money put aside for deposits who were seeing the benefits of lower rates, he said.

Nervous banks are still clamping down on more risky lending and borrowers with no or low deposits are continuing to find it costly to secure home loans, according to the Bank.

Figures earlier this week from the Bank revealed that two-year fixed rate mortgages for those with a deposit of 25% of the property value had fallen in price for the first time since February.

However, the Bank did not release data for the third month running for two-year fixed rate mortgages at 95% loan-to-value due to the lack of home loans on offer for those with lower deposits.

Mr King said: "It's the riskier borrowers who are finding it more expensive. The credit crunch hasn't had an enormous effect on those people who are saving to borrow."

He poured cold water on speculation that the Bank was considering extending the emergency £50 billion special liquidity scheme, introduced this year to help banks.

Reports had suggested that the Chancellor was poised to widen the scope of the scheme, which allows banks to swap mortgage-backed securities for Treasury bills.

Currently it only allows banks to use securities on mortgages taken out before the start of the year as collateral, but the Chancellor is reportedly considering allowing it to include new mortgages.

Mr King made it clear that the Bank did not want to prop up the mortgage market.

"Funding is not something the central bank can supply," he said.

"Why should the taxpayer take on the risk of borrowing by individual borrowers, some of whom are risky? It's the lenders who should take on the risk. Pretending there's a magic solution is not the answer."

Banks will need to mobilise consumers to increase savings deposits to provide an alternative lending stream to the crisis hit wholesale money markets, he said.

Copyright © PA Business 2008