Consumer borrowing powers on unexpectedly in May

Unsecured credit rose £1.7bn in the month, against City predictions of £1.4bn increase

(PA)

The British consumer continued to borrow strongly in May, despite City analysts expectations of a slowdown, the latest data from the Bank of England showed on Thursday.

Unsecured credit rose £1.7bn in the month, against City predictions of a £1.4bn increase.

That took the three month annualised growth rate of unsecured consumer credit up from 9.7 per cent to 10.2 per cent.

The annual growth rate was steady at 10.3 per cent.

Credit card borrowing rose at a 9.1 per cent annual rate, while other loans and advances (which include car finance and personal loans) grew by 10.9 per cent.

The Bank of England's Financial Policy Committee earlier this week warned about the risks of excessive consumer borrowing, which is growing far faster than incomes, and announced various measures designed to help rein it in.

The latest Bank data tells a different story to that of the British Bankers' Association, which reported a sharp drop in the annual growth rate of consumer credit from 6.4 per cent in April to 5.1 per cent in May, the weakest since October 2015.

The BBA said the divergence was likely due to the fact the Bank data includes car finance, which has been growing strongly in recent years.

Still growing

"This suggests that households remain confident enough to increase borrowing to help smooth consumption, in the face of the squeeze on their real incomes," said Ruth Gregory of Capital Economics.

The Bank said on Tuesday that it would publish tighter rules on unsecured consumer lending next month and bring forward an assessment of lenders' potential losses on consumer credit.

After announcing an increase in banks' counter-cyclical capital requirements to 0.5 per cent this week, it also signalled its plans to raise them again to 1 per cent in November.

Different picture

The economy has been powered by consumer spending since last June's Brexit vote, which has itself been supported by lower household saving and borrowing.

The aggregate household saving ratio fell to its lowest on record in the final quarter of 2016.

"Growth in households’ financial resources...is vulnerable to a slowdown in consumer credit; lenders have warned recently that they intend to restrict the supply of unsecured lending," said Samuel Tombs, economist at Pantheon.

There were also 65,202 new mortgage approvals in May, up from the revised 65,051 figure for April, and more than the 64,000 forecast by the City consensus.

Loans to businesses grew at a 3.9 per cent rate in May, up from 3.6 per cent in April. The growth rate of loans to small amd medium size firms fell back to 1.2 per cent, from 1.4 per cent previously.

Speculation that the Bank's Monetary Policy Committee could be preparing to raise interest rates in August has sent sterling up to $1.2985, its highest in a month.

The Bank's Governor, Mark Carney, said on Wednesday that "some removal of monetary stimulus is likely to become necessary".