A near-double-digit increase in lending to households in the year to September has left the Bank of England on track to raise interest rates on Thursday, amid concerns that consumers are creating an unmanageable mountain of unsecured debt.

The pace of annual consumer credit growth was 9.9% last month, according to figures from the central bank, as borrowing on credit cards, overdrafts and unsecured loans jumped.

The consistent appetite for borrowing is likely to put further pressure on the Bank to raise interest rates this week, with other indicators such as inflation and unemployment already supporting the case for a rise.

Last month the Bank said British lenders needed to hold an extra £11bn of capital to guard against consumer loans going sour, due to concerns that banks had overestimated the creditworthiness of their borrowers.

Consumer credit has rocketed since 2014 when it was running at an annual rate of 4%. Last year the annual growth rate hit 12%, with the latest September numbers creating a a consumer debt of more than £204bn.

Analysts were unsure whether the increase was a sign of growing confidence among consumers or desperation as wages growth stagnated and inflation rises. Only a steep fall in car loans in recent months has stopped the overall level of consumer credit creeping back to last year’s levels.

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said regulators should monitor the effects of an interest rate rise, which will increase pressure on many household finances.

“With household debt a growing concern and an interest rate rise likely as early as this week, we encourage households to exercise caution before taking on additional borrowing – and consider how they would be able to cope with repayments in the event of a shock to their income.

“Millions of people will have never experienced an interest rate rise. We are concerned that a small rise, combined with high levels of borrowing, rising living costs and slow wage growth could be enough to push many households into financial difficulty,” she said.

Government data on Friday showed that personal insolvencies rose to a five-year high in the third quarter.

Mortgage lending rose by a more modest 3.2% on the year to £3.85bn in September. Britain’s housing market has slowed since the vote to leave the European Union in June 2016, especially in London and the south-east. The combined level of mortgage and consumer lending was up 4%.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said competition among mortgage lenders had driven down fixed-term loan rates, increasing consumer’s disposable incomes, although this was likely to reverse with an increase in the Bank base rate and tighter lending criteria imposed by banks.

He said consumer confidence was also waning, adding to the likely fall in borrowing and spending over the coming months.

Meanwhile, figures from pollsters GfK showed that consumer confidence in the UK dropped last month as consumers showed “no real get-up-and-go”.

The firm’s monthly index, carried out for the European commission, slipped from -5 to -6 in October to register its 18th straight month indicating negative sentiment. Until last May, two months prior to the Brexit vote, the GfK index had spent three years in positive territory.

consumer confidence chart

A spokesman for GfK said its measure of spending on big ticket items like furniture and cars showed a small rise in last month, which it described as “more worrying than reassuring”.

He said: “Surging credit card use is fuelling spending at the expense of our appetite for saving, which is growing at the slowest rate since the start of the 2008/2009 financial crisis.

“We are now entering the crucial Christmas trading season and it will be a testing time for retailers and consumers alike. Will consumers carry-on shopping or start to cut-back in the face of mounting pressure on our pockets?”

Tombs said: “Looking ahead, credit likely will drag on growth in households’ spending. The fall in consumer confidence over the summer points to a pull-back in spending on big-ticket items ahead.

“Meanwhile, the Bank of England’s Credit Conditions Survey for the third quarter showed that the largest majority of lenders since 2008 plans to restrict the supply of unsecured credit over the next three months,” he said.

Less than 30% of households have mortgages, and 60% of these are fixed-rate, compared with 30% about 15 years ago.


Phillip Inman

The GuardianTramp

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