* Lenders expect to increase supply of credit in Q3
* Mortgage demand not expected to pick up
* BoE's Miles says bank lending still very low
By Christina Fincher and Avril Ormsby
LONDON, July 2 (Reuters) - British lenders expect to make credit more easily available to households and businesses over the coming quarter but are not expecting much of a pick-up in demand, a survey by the Bank of England showed on Thursday.
The quarterly credit conditions survey showed government intiatives to boost lending had enjoyed some success -- secured credit to households increased in the second quarter for the first time since the third quarter of 2007.
But lenders expected spreads on new mortgage lending to remain wide, meaning borrowers would not see the full benefit of record low interest rates. And spreads on corporate lending were expected to widen further.
"While there are some encouraging signs in the credit conditions survey, the UK is certainly not out of the woods yet," said Colin Ellis, an economist at Daiwa.
"As long as credit scores continue to tighten, that will make it harder for households to get funding, which is likely to restrict activity, particularly in the housing market, for some time."
Britain's central bank slashed interest rates to a record low 0.5 percent in March and has been pumping cash into the economy by buying assets, mainly government bonds, with newly created money.
So far, the BoE has bought just over 100 billion pounds of assets under its quantitative easing programme, putting it on track to complete its 125 billion pound target by the end of the month.
QE QUESTIONS
Economists are split on whether the central bank will extend its QE programme but all agree that credit conditions will be key to that decision.
Although mortgage approvals have picked up from record lows hit last year, hard indicators of lending remain weak. David Miles, a new recruit to the central bank's monetary policy committee, noted that bank lending remained low and a sustained pick-up was not guaranteed.
"The prospect of a rapid return to growth doesn't seem a highly probable outcome. But there are reasons for thinking the period of rapid declines in output are behind us," Miles told a Treasury committee.
The BoE survey noted that concerns about the economic outlook had continued to bear down on credit availability in the second quarter, but the impact had been less than in previous quarters and lenders had expected to increase credit further in the coming quarter.
However, while lenders expected demand for loans from small businesses to pick up, they did not expect any increase in demand for mortgages.
There was also an expectation that default rates would continue to rise and little appetite to cut spreads -- the margin over the Bank rate that lenders charge for credit.
"The survey was not overly encouraging about the outlook for bank lending and therefore the prospects for overall economic growth," said Vicky Redwood at Capital Economics.
"The improvement in the balances may just have reflected the lending commitments made by lenders participating in the Asset Protection Scheme, rather than a fundamental shift in lenders' risk appetite." (Additional reporting by David Milliken and Fiona Shaikh; editing by Chris Pizzey)