Shoppers fuel record rise in consumer borrowing

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The Independent Online

Consumer borrowing registered a record rise last month as lower interest rates encouraged shoppers to run up larger credit card bills. The data coincided with a sharp fall in business confidence and left economists at odds over the direction of interest rates in the short-term.

Total borrowings through loans, overdrafts and credit cards grew by £1.08bn in December, against a £918m rise in November. The figures, produced by the British Bankers Association, were boosted by a £369m rise in credit card borrowing and are consistent with the recent spate of upbeat trading statements from retailers.

There were, however, signs that the housing boom was cooling, with growth in mortgage lending easing to £3.80bn in December, just above its trend level of growth. The Building Societies Association reinforced the impression that property was coming off the boil with news that mortgage approvals had fallen from £2.53bn to £1.96bn in December. The Council of Mortgage Lenders reported gross mortgage lending of £14bn, against £15.4bn in November, as the number of new home loans fell to 109,000 from 127,000. For 2001 overall, gross mortgage advances grew 35 per cent to a record £162bn.

Consumers' appetite for credit contrasted with caution among business and industry, where the BBA said lending was generally subdued amid moves to pay down debt. The Institute of Directors underscored business's vigilance with a survey showing business confidence was at its lowest level in three years during the fourth quarter of 2001.

Consumer spending is expected to slow as unemployment rises but economists remain divided over whether interest rates are likely to be cut from their present 4.0 per cent. Some pointed to news yesterday that government spending rose 11 per cent in the fourth quarter as a sign that the economy was guaranteed a strong upturn this year. Government spending exceeded income by £9.4bn last month, putting the deficit at a six-year high.

John Butler, a UK economist at HSBC, said: "People's finances still look healthy but further out the consumer could end up being punished [with rate increases] for bailing out the economy in the short-term."

However, Simon Rubinsohn, a chief economist at Gerrard, said a rate cut was still possible and the property market was likely to strengthen further. "If unemployment begins to pick up in a more material way property prices may struggle to make much progress. Near term, a lack of quality supply allied to the opportunity to lock into attractive financing arrangements could squeeze the market higher," he said.