Credit rise adds to inflation fears

DIANE COYLE

Economics Correspondent

New evidence of rapid growth in consumer borrowing yesterday highlighted concerns about the longer-term prospects for inflation expressed by Eddie George, Governor of the Bank of England.

Separate figures showed that new orders for consumer goods were a bright spot in Britain's still-subdued manufacturing industry, suggesting that the Chancellor's predicted consumer recovery is under way.

The amount of new consumer credit in December leapt by pounds 797m, the second- biggest monthly increase on record, following a pounds 600m rise in November.

Credit card borrowing set a record, rising pounds 276m during the month.

Last year saw the biggest increase in consumer loans since the series began in 1987. At pounds 7.5bn it exceeded the pace of increase during the late- 1980s boom.

Both Mr George and Kenneth Clarke, Chancellor of the Exchequer, have recently expressed concern about the rapid growth of money and credit. In minutes of their December meeting, released earlier this week, the Governor gave it as a reason for advising no more than a quarter point cut in interest rates in order for inflation to fall below its target some time during 1997.

However, Bank of England figures confirmed earlier reports from banks and building societies that net mortgage lending fell slightly in December to pounds 1.2bn.

This compared with pounds 1.3bn the previous month and pounds 1.5bn a year earlier. Total housing loans fell by 22 per cent to just over pounds 15bn between 1994 and 1995.

House prices rose in January for the sixth month in a row, according to Halifax Building Society, but the increase was 0.1 per cent. Prices were 1.2 per cent lower than a year ago.

"Our optimism about a recovery is still tinged with caution," said Halifax, the biggest mortgage lender, while Britannia Building Society said yesterday its mortgage lending had dropped 24 per cent last year.

Adrian Coles, director general of the Council of Mortgage Lenders, took an upbeat view of the figures, however. He said: "It seems that the trough in activity last summer is now being overcome."

The British Bankers' Association said personal demand for loans was the driving force behind banks' lending last year. It said mortgage lending and consumer credit had picked up in the fourth quarter.

A survey of purchasing managers in industry provided further signs that the economy is working its way out of the recent slowdown.

The overall index of activity fell from 50.8 in December to 50.2 last month - only just above the 50 watershed between growth and recession. Output growth fell to its lowest since October 1992, but mainly because capital goods manufacturers were running down stock levels.