Surge in consumer lending heightens fears of rate rise

Interest rate fears continued to dominate the markets yesterday after UK consumer lending rose by a record pounds 1.22bn in February and there were further signs of strength in the US economy. The surge in lending, coming after an increase of pounds 844m in January, was much higher than expected, rekindling fears of a return to the 1980s consumer boom. But the FTSE 100 index largely shrugged off a new slump on Wall Street, ending down just 11.5 at 4,236.6.

Analysts said the credit figures increased the need for the new Chancellor of the Exchequer, whoever he was, to raise interest rates after the election by as much as half a per cent. David Coleman, chief economist at CIBC, said: "Consumer borrowing continues to grow at quite a healthy pace. It keeps the pressure on whoever is the next Chancellor to raise rates just as the US has done." The US move to raise money costs by a quarter of a per cent last week raised expectations that further tightening may be necessary.

But observers stopped short of comparing current credit conditions with those of the 1980s, with many pointing out that in percentage terms the borrowing rise is still below previous peaks and savings remain high. They also drew some comfort from Bank of England money supply figures which showed M0 growing by 6.4 per cent in the year to March, just below expectations of a 6.5 per cent increase.

However, James Barty, an economist with Morgan Grenfell, highlighted the broader M4 measure, where growth was revised down to 11.2 per cent from 11.3 for the year to February, but still up from 10 per cent in January. He said the figures showed the economy would continue to strengthen this year.