Consumer credit surges to record high

But pound dives as gloom over industry's prospects deepens

New figures yesterday revealed a record surge in consumer credit in June, along with signs of a renewed pick-up in mortgage lending. The news drove speculation that next week will bring a fourth successive rise in the cost of borrowing to fever pitch.

At the same time the pound dived for the second day running, falling below three deutschemarks and reaching its lowest level for two weeks as investors took profits.

Despite the fresh evidence of a booming economy, analysts blamed sterling's bout of weakness on industry gloom about production and job prospects.

Bank of England figures showed that new consumer credit amounted to a record pounds 1.3bn in June, far higher than expected. Growth in credit has climbed sharply to an annual rate of more than 18 per cent.

Mortgage lending is growing at a more sustainable rate of 5.5 per cent, but there were signs of a pick-up in yesterday's figures.

Both the value and number of new loans approved, good indicators of future house price inflation, accelerated in the three months to June. Their value was nearly 15 per cent higher than in the same quarter last year.

Total lending by banks and building societies increased by pounds 5.7bn in June, more subdued than recent monthly rises due to a reduction in borrowing by financial institutions such as pension funds.

Members of the Bank of England's monetary policy committee are likely to be focused instead on accelerating broad money growth, now at 11.7 per cent and rising, and the signs of a consumer borrowing spree.

Tim Sweeney, director general of the British Bankers Association, said the high street banks' pounds 11.2bn lending to individuals in the second quarter of this year was the highest since their records began in 1991. This was due to strong consumer demand and the housing recovery, he said.

A further sign that the housing market is coming to the boil came from a survey conducted for Alliance & Leicester showing that one in 10 people plans to buy a new home during the next year, aided by the windfall of free shares from building societies converting to banks.

Alliance said: "It seems that external factors such as the prospect of higher interest rates and house price fluctuations are less of an influence on people's ability to move than cash in their pockets."

City analysts said yesterday's lending figures were the clearest sign yet of the windfalls having an effect on the economy. James Barty, at Deutsche Morgan Grenfell, said: "This fills in the picture painted by earlier evidence that consumers are feeling very, very upbeat."

John O'Sullivan, at NatWest Markets, said interest-free offers in many stores were tempting consumers to borrow more rather than spend their windfalls. "They are saving their cash to put on deposit in the next building society that is going to convert," he said.

The record consumer credit surge was widely seen as increasing the probability that the monetary policy committee will increase interest rates by a quarter point to 7 per cent after its two-day meeting next week.

But some economists remained gloomy about the economy's longer-term prospects, predicting the strong pound would have a dramatic effect on exports and industrial output.

Andrew Sentance, of the London Business School, said: "Obviously there is some concern about the strength of consumer demand now, but the strength of the exchange rate means the economy will weaken next year."

However, analysts said the pound's drop this week could not be blamed on fears of a slowdown next year.

"There has been nothing much behind it apart from profit-taking, and an overdone fear that German interest rates will rise," said Nick Stamenkovic at DKB.

The pound ended 3 pfennigs lower against the deutschemark yesterday, following a drop of more than 4 pfennigs on Monday.

Its index against a range of currencies fell 0.8 yesterday to 103.8, compared with 106.2 on Monday evening.