Consumer credit growth on increase

Consumer credit and mortgage lending bounced back in May, official figures showed today.

The data lent support to the Bank of England's theory that the UK's consumer slowdown could be temporary.

Net consumer credit rose by ?1.8bn in May, more than the ?1.6bn that had been expected and a sharp increase from the ?1.3bn in April, according to figures released by the Bank.

Mortgage lending rose by just under ?8bn, more than the ?7.4bn forecast by economists and up from ?7.3bn in April.

Earlier this month, Bank policymakers left interest rates unchanged at 4.75% for the 10th month running, but two of the nine members of the monetary policy committee voted for a cut. That fuelled speculation that a summer fall in borrowing costs could be on the cards.

Today's data, however, lent support to those MPC members who believe a cut in the next few months would be premature because it would encourage a return to excessive spending and borrowing.

The Bank this week warned that the record levels of debt people had taken on could be a threat to the economy.

In a financial stability review, it said the rate at which lenders were writing off consumer debt had risen sharply during the second half of 2004, with people unable to meet repayments on credit cards and loans. That increase may not have been fully anticipated by the banks.

Today's figures showed credit card lending rose by ?800m in May - the biggest increase since January and up sharply from ?358m in April. Britons now collectively owe a total of ?55.69bn on their plastic, while total consumer debt stands at more than ?1,099bn.

Many retailers have urged the Bank to cut rates because of softer spending on the high street since the end of the last year. However, the Bank's governor, Mervyn King, warned against reading too much into current retail softness.

"Consumer credit growth picked up more than expected in May, having been very low in April," Howard Archer, the senior UK economist at the consultancy Global Insight, said.

"This will raise speculation that consumer spending could be set to pick up to a limited extent after recent extended softness, thereby lessening the case for an interest rate cut as early as August."

Separate figures on mortgage approvals - loans agreed but not yet made, and considered as a pointer on the direction of the housing market - rose slightly to a 10-month high of 96,000 from 95,000 the month before.

While still down on the 122,000 of a year earlier, the data suggested a static housing market rather than any significant weakening.

In separate figures, HSBC said its June index, which measures personal loan, mortgage, and equity withdrawal enquiries at all its branches, showed borrowing down from 13.9% from a year ago.

John Butler, the chief UK economist at HSBC, said: "Demand for borrowing has slowed, but it is not collapsing. The risk of an early rate cut is that it could cause a re-acceleration."