UK consumer credit growth falls to 18-month low

  • Decline will soothe Bank of England fears about reckless lending when household incomes face squeeze
  • Household incomes are under pressure from stagnant pay growth and high inflation

The UK’s consumer debt boom eased back in October after growth in lending on credit cards and loans fell to an 18-month low.

The Bank of England said unsecured consumer credit grew by 9.6% year on year in October, down from 9.8% in September, soothing fears that banks were lending recklessly at a time when household incomes have come under pressure from stagnant pay growth and high inflation.

Britons added £1.5bn to the pile of consumer debt, which rose to more than £205bn.

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Sir John Cunliffe, the Bank of England’s deputy governor, said he did not think British households as a whole were going on a “debt-fuelled binge” but added that fast rates of consumer credit growth needed to be watched.

With salary increases averaging 2.2% and prices increasing at an average 3%, central bank officials have warned high street banks to rein in their risky lending to head off a consumer debt bubble.

Anti-poverty charities, concerned that middle and low income families are turning to credit to supplement their incomes, have blamed welfare cutbacks for exacerbating the problem.

Howard Archer, an economic adviser to forecasting group EY Item Club, said: “The Bank of England will be pleased with the slowdown in consumer credit in October and will be looking for a continuation of this trend.

“In its November financial stability report the Bank of England again warned that rapid growth in consumer credit has created a ‘pocket of risk’ and the central bank has also warned that banks risk becoming complacent in their lending behaviour.”

The Bank’s credit condition survey indicated that lenders cut the amount of unsecured credit available in the three months to the end of September at the fastest rate since 2009.

Analysts said the Bank’s message to lenders, heightened uncertainty over the outlook for the UK economy and increased concerns over personal finances were encouraging some consumers to be more cautious in their borrowing.
“However, the persistent squeeze on consumer purchasing power is likely fuelling the need for some consumers to borrow,” Archer said.

In October, the Bank of England hinted strongly that it planned to raise its base interest rate, which duly went up from 0.25% to 0.5% on 2 November.
Analysts said the threat of higher interest rates was likely to have dampened consumer credit, which was increasing at a rate of more than 10% earlier this year.

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Bank of England figures also show a fall in the number of mortgages approved by lenders in October, down to 64,575 in October from over 66,000 in September.
The fall in mortgage approvals for house purchases was the third monthly drop in a row and pushed the total to a 13-month low. The gloom was only alleviated by a frenzy of remortgaging approvals, which increased to 51,593, the highest since October 2008.

Mortgage approvals have dropped three months in a row. Photograph: Yui Mok/PA
Lenders were kept busy by homeowners wanting to lock in low rates ahead of November’s interest rate rise.

“We see house prices remaining muted through the tail end of 2017 and then rising a modest 2%-3% in 2018,” said Archer.

“Housing market activity remains under pressure from squeezed consumer purchasing power, fragile confidence and appreciable caution over engaging in major transactions,” he added.

Jeremy Cook, chief economist at WorldFirst, said figures showing a slowdown in corporate borrowing indicated companies were unwilling to invest while the economic outlook remained uncertain.

“The most interesting dynamic within the numbers may be that loans and overdraft facilities to the nation’s SMEs [small and medium-sized companies] fell by £400m between September and October,” Cook said.

“This highlights that these companies, which represent the backbone of the UK economy and are the largest employers of the UK workforce, are either unable or unwilling to borrow to fund current or future investment projects.”

Source: The Guardian

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