Surge in consumer credit dims rate cut hopes

Stronger-than-expected consumer credit figures yesterday appeared to rule out an early cut in interest rates despite a continued surge in the value of the pound against both the dollar and the mark.

A pounds 1bn rise in consumer credit, driven by a surge in credit card spending during April, was well in excess of expectations. Most analysts had pencilled in growth of about pounds 700m. They said the rise pointed to much faster economic growth in the second half of the year.

"Overall this is a pretty unambiguous signal that consumers are feeling more confident about the future," said Jonathan Loynes, economist at HSBC Markets. He thought the figures showed Budget tax cuts, which took effect in April, had quickly made themselves felt in people's pockets.

In the currency markets, dealers said a well-covered gilt auction on Wednesday, and yesterday's strong credit numbers, had fuelled buying interest in sterling. The pound reached $1.55 and DM2.36 in London, continuing its recent surge against the dollar (up more than 3 cents over the past two days) and the mark (up 2 pfennigs in the same period.).

Analysts agreed that the credit data more or less guaranteed there would be no cut in interest rates at next Wednesday's monthly monetary meeting between the Chancellor, Kenneth Clarke, and Eddie George, Governor of the Bank of England.

HSBC's Adam Cole added: "The April consumer credit data are further evidence that we are on the verge of a veritable boom in consumer spending.

"Against a background of falling taxes and rising income, one might have expected consumers to borrow less. Quite the opposite is happening, suggesting the acceleration in consumer spending goes beyond simply the arithmetic of recent tax cuts and windfall gains."

HSBC believes that the Chancellor's forecast of 3.5 per cent consumer spending growth this year, which was slated as hopelessly optimistic last November, looks increasingly plausible.

Spending would be underpinned by continuing recovery in the housing market, which was confirmed yesterday by a 1.4 per cent year-on-year rise in Nationwide Building Society's house price index and another rise in mortgage commitments in April. Figures from Halifax on Monday are expected to show a rise of up to 4 per cent in its own, larger index.