Photographer: Luke MacGregor/Bloomberg

BOE Consumer Puzzle Involves Debt Shifts, Brexit and Inflation

Mark Carney says action to rein in borrowing would be a ‘big call’

U.K. households are taking out unsecured loans at the fastest rate since before the financial crisis and Bank of England officials aren’t sure how worried they should be.

Testifying before U.K. lawmakers this week, the BOE’s executive director for financial stability, Alex Brazier, said the the pace of growth is a “difficult number to ignore,” while Martin Taylor, a member of the Financial Policy Committee, said it was like “flashing lights.”

Growth is likely to continue, with a BOE report on Friday showing demand for credit card and other unsecured lending increased in the fourth quarter and the latter is expected to increase again in the next three months.

But responding with direct measures to put a damper on borrowing would be a “big call,” according to Governor Mark Carney, and policy makers aren’t convinced they need to act. While they are taking comfort from the fact that the number of highly indebted households has fallen in recent years, there’s also the fact that they aren’t really sure what’s going on.

According to Taylor, who spent five years as chief executive of Barclays in the 1990s, there are a number of potential factors at play in the surge in lending. New underwriting standards are also making it harder to top up a mortgage to, for example, buy a car. With that avenue shut down, that’s sent people over to short-term loans.

“Although they’re a lot more expensive than mortgages, they’re a lot cheaper than they used to be. There’s maybe some kind of arbitrage, some shifting in consumer behavior.”

There’s also the possibility that people are borrowing to buy large durable goods because they’re worried that the pound’s drop since the Brexit vote will push prices higher. That’s something – in a world of Marmitegate and warnings about an inflation pickup – that the BOE has previously highlighted in its analysis of consumer spending.

Bringing forward purchases like that would be a “perfectly rational thing” and – crucially – “it wouldn’t necessarily be something for supervisors or regulators to worry about,” according to Taylor. 

So what to do? The view of the former banker is first figure out exactly what’s happening so policy makers can decide if they should actually be worried about it.

“It needs a different and rather more surgical approach, if this is a problem, which I’m not yet convinced it is. It’s certainly is a flashing light and we shall look at it carefully.”

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