Consumer Credit Resilient in Wake of BoE Interest Rate Rise but Mortgage Approvals Fall in December

December’s net lending data is noteworthy as it provides the first insight into the immediate impact on lending of the Bank of England’s November interest rate rise.

Borrowing by UK consumers gathered pace during December, according to Bank of England data released on January, 30, although the number of new mortgage approvals fell during the month.

Total net lending to households was £5.2 billion during the month, up from £4.9 billion in November and in contrast with the economist consensus for a small fall to £4.8 billion.

Within this, £1.5 billion was the result of lending directly to consumers, which pushed the annual growth rate for consumer credit up by 20 basis points to 9.5%.

This change merely reverses a small fall that took place during November by taking the 12 month growth rate back to where it was in October. 

However, December’s data is noteworthy as it not only marks the final installment of the 2017 year, but also gives the first insight into the immediate impact the Bank of England’s November interest rate rise had on lending.

“With households still confident enough to continue to borrow to sustain their spending growth while real wages are being squeezed, and bank lending to the economy as a whole holding up well, we continue to think that the economy will maintain its pace rather than slow this year,” says Paul Hollingsworth, a senior economist at Capital Economics.

The Bank of England raised interest rates for the first time in a decade back in November, taking the Bank rate up 25 basis points to 0.50%, as part of an attempt to combat rising inflation.

However, another reason behind the rate rise, which was cited by the bank at the time but often overlooked since, was a desire to reign in runaway growth in consumer credit.

Households have borrowed in ever increasing amounts to maintain spending during recent years, partly as a result of almost a decade of below-inflation pay growth.

Bank of England fears have been that such growth, in absence of matching increases in wage packets, could present a risk to financial stability. So far, this effort by the Bank to reign in credit growth looks to have been in vein.

“December’s money and credit figures showed a widening divergence between household borrowing to fund a house purchase, and borrowing to sustain other areas of spending,” Hollingsworth notes.

Separately on Tuesday, Bank of England data showed the number of new mortgages and remortgages approved by banks falling sharply, to its lowest level since January 2015.

Lenders approved just 61,039 new mortgages during the month, down from over 65,000 in November and below the economist consensus for around 63,500 new loans to be agreed.

Remortgaging loans dipped sharply to 46,475 from 53,890 during the previous month, taking them back to September’s level.

“Looking ahead, with new buyer demand still weak, mortgage approvals are likely to remain subdued,” Hollingsworth remarks, in a note to clients Monday.

December’s borrowing data comes closely on the heels of fourth quarter economic growth numbers, which showed the UK economy growing by 1.8% during 2017 as a whole. This was a touch slower than the 1.9% growth seen in 2016.

Expectations for the year ahead are mixed, with economists increasingly divided over the prospects for the UK economy during 2018.

The consensus, in other words average of all economist estimates, is for the UK economy to grow by a lowly 1.4% in 2018, implying a steep slowdown from 2017’s levels of growth.

Capital Economics forecast the UK economy will grow by “around 2% this year” as real GDP receives a technical boost from falling inflation and the lower value of the Pound continues to stimulate the export side of the economy.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.