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UK consumer borrowing cools as BoE action take toll

Aug 30 2017 13:00
David Goodman and Andrew Atkinson, Bloomberg

London - UK consumer credit grew at its slowest pace in more than a year in July, suggesting a weakening economy and Bank of England (BoE) action are making households less willing to take on debt.

Unsecured lending rose 9.8% from a year earlier, the least since April 2016 and down from 10% in June, the UK central bank said on Wednesday. It grew £1.2bn on the month, well below the £1.6bn averaged this year.

Consumer borrowing has surged in recent years, boosted by record-low interest rates. More recently, households may have turned to credit to maintain their standard of living as rising prices eroded their spending power. But their appetite for debt now appears to be cooling.

Against a backdrop of tense divorce talks with the European Union, the UK economy has had its worst start to the year since 2012, with consumer spending - which kept the economy growing in the aftermath of the Brexit referendum -- barely expanding between April and June.

The BOE has also stepped in to prevent a potential credit bubble, raising capital requirements for UK banks in June and then announcing the end of its Term Funding Scheme, introduced last year as part of a post-Brexit stimulus package to encourage banks to continue lending.

The slowdown may not be enough to head off further action from the BoE, which has signaled a further increase in the countercyclical buffer to 1% of risk-weighted assets from 0.5% in November in the absence of a material change in credit growth.

“Some moderation could well be a welcome sight, but the bank may still decide to tighten conditions later in the year,” said Philip Shaw, an economist at Investec in London.

“It may be worries about credit are sufficiently ingrained to see the bank getting out its macroprudential toolkit to deal with credit growth later in the year.”

Default risk

While consumer credit accounts for just a fraction of total household debt, financial-stability officials have warned that people are much more likely to default on unsecured loans than they are on their mortgages. Car lending has come under particular scrutiny by the BOE in recent months after it has grown by about 20% a year since 2012.

Executive Director Alex Brazier warned last month that a rise in consumer credit has created a “pocket of risk” that may weaken the financial system if it gets out of hand.

Borrowing on credit cards grew an annual 8.9% in July. Lending including vehicle finance, personal loans and overdrafts rose by 10.3%. Both figures were slightly lower than the previous month.

Non-financial business lending climbed to £8.1bn, driven by large firms. That’s the most since records began in 2011.

Separate data showed growth in the mortgage market, with home-loan approvals rising to 68 689 in July, the highest since March 2016. Actual lending rose by £3.6bn, from £4.1bn a month earlier.

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boe  |  uk  |  debt  |  economy

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