British borrow a record extra £6.8bn

Consumers took advantage of cheap credit to notch up record new debts in November, it emerged yesterday, as the service sector showed its first signs of recovery.

Total lending to individuals rose by £6.8bn in November, according to new figures from the Bank of England - the largest monthly increase since the series began in April 1993.

Analysts said the strong increase in personal debt almost certainly ruled out a further cut in interest rates when the Bank of England's monetary policy committee meets next week.

Some even raised the possibility that rates could rise this month for the first time since February 2000. Sir Eddie George, governor of the Bank of England, said in an interview on Thursday that rates might have to increase in the medium term if consumer spending did not ease.

"The UK consumer is still confident that the low levels of interest rates are exciting the housing market," said David Page, of Investec. "It is certainly unlikely there will be a cut [in interest rates] next week and we would go further and argue that they are now at the bottom of the cycle."

Britain's borrowing boom may have helped to fuel a recovery in the service sector, according to a separate survey released yesterday.

The Chartered Institute of Purchasing and Supply's business activity index for services firms rose to 49.4 in December, from 47.3 in November: below the 50 break-even level for the fourth consecutive month, but indicating a slower rate of contraction. Firms also reported the first increase in new orders for five months.

CIPS said the transport, hotel and restaurant sectors had staged a particularly strong fightback, after declining rapidly as demand for travel collapsed following September 11.

Despite this, other economists said the continued vulnerability of the global economy, coupled with the long-term decline in the British manufacturing sector, could force the Bank to make more reductions in rates in the coming months.

"Taken together, today's numbers confirm that the domestic economy continues to hold up well in the face of the global economic slowdown," said Jonathan Loynes, of Capital Economics.

"But the MPC needs to stand ready to lower rates again if there are any signs of consumer spending and domestic activity slowing while the global background remains so weak."

The buoyant property market is helping to prop up consumers' borrowing, with mortgage-lending up 10% year on year in November, according to the Bank of England figures, accounting for £5.3bn of the month's rise in borrowing.

Fears that households may be racking up an unsustainable level of debt were heightened by analysis of mortgage equity withdrawal figures for the third quarter of 2001. These showed consumers cashing in on rising property prices at the fastest rate since the height of the Lawson boom, by drawing down a total of 4.9% of their post-tax income.

"Consumers are spending more than their income and using the value of their house to build up their borrowing," said Michael Hume, of Lehman Brothers. "That makes them very vulnerable to any change in the property market."