Consumer lending surge comes off the boil

Consumers' appetite for debt showed signs of waning last month with unsecured lending rising at its slowest rate for three years, figures showed yesterday. The Bank of England said borrowing through loans, overdrafts and credit cards increased by just £834m in December, well down on November's £1.44bn jump and nearly half October's rise of £1.63bn.

However, mortgage borrowing remained strong and the number of new approvals was higher than had been expected, pointing to further rises in house prices in the spring. Total loans to the household sector hit £17.44bn during the month, the fourth highest figure on record. A total of 121,000 mortgages were agreed, a small drop from the 124,000 in November but the fourth month in a row it had exceeded 120,000. Lending secured on dwellings rose by £7.28bn last month, down from £8.6bn in November and the weakest since March last year.

The pound fell against the dollar and the euro as the figures cast doubt over the markets' expectation that the Bank of England will raise interest rates next week. But analysts said one month's figures in a notoriously volatile index would not be enough to deter the Monetary Policy Committee from following through on a series of hints that it is planning to tighten policy. Philip Shaw, an economist at Investec, said the lending figures were surprisingly weak and suggested consumer borrowing was slowing down. But he added: "I don't think the Bank will take too much notice of one month's figures, and the likelihood is that the MPC will raise rates again next week. If they remain weak, and it's a big if, we may be closer to the peak in interest rates than we previously thought."

Alan Castle at Lehman Brothers said the Bank's figures sat uneasily alongside figures from high street banks pointing to continued increases in lending and with a surge in retail spending in December. "We tend to put more weight on the forward looking [approvals] data - and here the news was strong," he said. "All in all, the ongoing strength of the approvals figures points to further upward pressure on house prices."

Analysts also seized on comments by Paul Tucker, the executive director of the Bank of England, who said rates would have to rise. In comments given just 12 hours before the Bank published the lending figures, he said the MPC would raise rates as the economy ran out of spare capacity and inflationary pressures emerged.

Most analysts now think the Bank will raise rates next week as other signs suggest the economy is gathering momentum. The economy grew at the fastest pace for three years over the winter, retail sales were robust in December, the CBI declared the manufacturing slump over and consumer confidence rose to a 14-month high. Geoffrey Dicks, at Royal Bank of Scotland, said: "In the light of recent data ... unchanged rates would represent a major surprise."

Most economists agreed the one hurdle to a rate rise could be the recent rise in the value of the pound, which could hurt UK exporters, and in the euro, which could cut demand from the continental economies.

Mr Shaw said: "The possibility of inflation remaining low, the threat of a weaker dollar and the possibility of a negative reaction from UK consumers all provide plausible risk scenarios where rates might not rise as fast as our central case suggests."