Photographer: Simon Dawson/Bloomberg

U.K. May Consumer Borrowing Surges, Showing Why BOE Took Action

Updated on
  • Consumer credit rose 1.7 billion pounds, most since November
  • Unsecured lending continues to grow at more than 10% a year

Consumer credit continued to grow at a double-digit pace in May, underlining why Bank of England officials took action to protect banks against the risk of a debt bubble.

Unsecured lending rose 10.3 percent from a year earlier, the same as in April and close to its fastest rate since 2005, the U.K. central bank said on Thursday. It grew 1.7 billion pounds ($2.2 billion) on the month, the biggest increase since November last year.

The BOE this week responded to the rapid buildup of credit by ordering lenders to hold billions of pounds of extra capital in case the economy turns sour and customers cannot pay back their debts.

While consumer credit accounts for just a fraction of total household debt, people are much more likely to default on unsecured loans than they are on their mortgages, financial-stability officials warned. Of particular concern is car lending, which has grown by about 20 percent a year since 2012.

Borrowing on credit cards grew an annual 9.1 percent in May, boosted by interest-free periods now lasting over 40 months in some cases as competition between providers intensifies. Lending including vehicle finance, personal loans and overdrafts rose by 10.9 percent.

Separate figures showed unexpected resilience in the mortgage market, with home-loan approvals rising to 65,202 in May and actual lending increasing by 3.5 billion pounds, the most since March last year.

Weakness Predicted

But economists expect lending to weaken as the housing market slows. House prices posted their first quarterly decline in almost five years between April and June, figures from Nationwide Building Society showed Wednesday.

Lending to non-financial firms rose 3.6 billion pounds in May. Non-resident investors bought a net 8.38 billion pounds of gilts, the most since November 2015, after purchases of 1.95 billion pounds in April.

With rising inflation eating into the purchasing power of consumers, there are concerns that people turning to easy money to help finance their spending may struggle to keep up with their debt payments if interest rates increase.

Traders increasingly expect the BOE to hike its benchmark rate this year, spelling the end of record-low borrowing costs. The average rate on a 10,000-pound personal loan fell to 3.79 percent in May, down from levels above 10 percent during the financial crisis, the BOE figures show.

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