Let us hope that Britain’s banks don’t pay too close attention to the chart on page 6 of the Bank of England’s Inflation Report. It shows the Bank’s range of forecasts for economic output in the form of one of its familiar “fan” charts. In this case, the fan is wide enough for a sumo wrestler.

It shows that in two years’ time it is quite possible that the economy will have grown at more than 3 per cent over the previous 12 months. But it is equally possible that it will have shrunk.

The idea that there is a material risk that the economy could continue to contract for another two years should be distinctly unnerving for lenders. It would mean another mountain of bad debts eating away at the capital cushion that the banks have so painfully acquired.

A large proportion of banks’ commercial loans are secured against property and yesterday’s figures from Land Securities are a reminder of how secure that is. The country’s largest property company marked down the value of its holdings by a third during the year to March and Francis Salway, the chief executive, was very cautious about the outlook.

If the banks think that there is a serious risk of a prolonged downturn, it would be entirely rational for them to be very cautious about new lending now – which, of course, would make it all the more likely that the path of the economy will look like the bottom edge of the fan.

Mervyn King, Governor of the Bank of England, yesterday identified the behaviour of the banks as one of the key reasons that economic forecasts are so uncertain at the moment. They have raised enough capital to quell fears about their survival. But how much do they need to quell their own fears about lending in a “normal” way? Mr King thinks the banks themselves don’t know the answer to that.

But, as Alan Greenspan suggested this week, the level of capital needed for the American banks may be considerably higher than the level the regulators are now requiring.

In many ways, the credit markets have returned to the merely nervous state that they were in before Lehman Brothers collapsed, rather than the panic that this precipitated last September. The rates at which banks lend to each are back close to levels last seen before Lehman went under. But the actual flows between banks are a mere dribble. The Bank notes that longer-term funding is still scarce, perhaps reflecting continuing concerns about banks’ capital.

Lending growth is weak, which will partly reflect subdued demand. But Mr King said that anecdotal evidence about the terms being demanded by the banks suggests that there is also a significant supply problem.

The CBI says that its members’ experience is that access to credit is not getting any worse, but it is not getting much better, either.

Mr King’s cautious fence-sitting unnerved investors, with the pound losing ground and the FTSE 100 down 2 per cent.

So how much further has the share rally to go? The fund managers over at Legal & General have as big a fan as Mr King. They are forecasting that the FTSE 100 index will rise by 9 per cent this year – but this central prediction comes with a generous margin of error. Shares could rise 50 per cent, they say. Or fall 25 per cent. Great.

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