Record rise in consumer borrowing renews pressure for higher rates

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The prospect of a quarter-point rise in interest rates later this month drew closer yesterday after it was revealed that lending to consumers soared to record levels in November. Hopes of a further rise in money rates allowed the pound to recoup nearly all the previous day's losses against the German mark.

The upsurge in consumer confidence has, for the first time, taken the total outstanding on credit cards, overdrafts and other unsecured lending to individuals beyond the levels of the boom years of the 1980s. Following last month's news of a record fall in unemployment for November, analysts said the lending figures from the Bank of England would add to the pressure on Kenneth Clarke, the Chancellor, to raise rates after his meeting with Bank of England Governor Eddie George on 15 January.

Adam Cole, economist with brokers HSBC James Capel, said the latest news had to be a cause of some concern. "The fact is that consumers are experiencing quite strong income and supplementing that with quite strong borrowing as well .... If that continues you could see consumer spending picking up momentum in the year ahead." He forecasts growth of 4.5 per cent in the current year, up from 3 per cent in 1996.

The only question, he said, was whether rates needed to go up ahead of crucial figures on retail sales in December and gross domestic product for the fourth quarter due in a few weeks. "I think the answer is, on balance, that they should."

But the Government hailed the lending data as further evidence of the strength of the economy. Michael Jack, Financial Secretary to the Treasury, said: "This is a welcome set of figures which confirms the growing confidence of individuals in the strength of the economy. At a personal level borrowing remains sensible and [people are] well within their ability to service the credit they want."

Net consumer credit rose by a seasonally adjusted pounds 1.1bn pounds in November, up from pounds 875m in October and close to double the pounds 600m increase reported in November 1995. The increase over the year has accelerated to 16.6 per cent.

Adding in a pounds 1.72bn rise in mortgages, the total lent to individuals soared by pounds 2.83bn, the biggest rise for six years.

The evidence of a consumer boom was reinforced by figures from the John Lewis Partnership showing its department store recording sales 8.8 per cent ahead in the week to 28 December compared with the same week the previous year.

But commentators suggested that the credit expansion was containable. The Council of Mortgage Lenders said the recovery in the housing market "should not cause concern about the possibility of an uncontrolled house- buying boom". Separately, Oxford Economic Forecasting, an independent group, said higher interest rates, which it forecasts will hit 7 per cent by the summer, would be required to dampen growth in spending.

The pound added nearly three and a half pfennigs to DM2.6412, but dipped slightly against the dollar to $1.6862. Shares rallied after Wall Street put on around 60 points during London trading, with the FTSE 100 ending 32.1 ahead at 4,089.5.

Other figures yesterday showed the UK's official reserves suffered an underlying outflow of $109m in December. The Bank of England also confirmed that M4, the broad measure of money supply, grew10.8 per cent to November.