Credit slowdown foxes the City

Consumer credit grew at its slowest pace for the last seven years in December, according to data released yesterday by the Bank of England.

Borrowing increased by 0.5% last month, the lowest figure since March 1997. The £834m rise was far less than the £1.4bn rise the City had been expecting.

The modest size of the increase in consumer debt cast doubts over the strength of the retail sector in the weeks either side of Christmas and left analysts divided over whether the fall was an aberration or the credit boom of the past few years was finally running out of steam.

The Bank's figures for lending run counter to the buoyant official data for retail sales in December, which showed a hefty 0.9% increase on November but chimed with survey evidence from the British Retail Consortium suggesting a poor Christmas for stores.

Despite the evidence of its own figures, the Bank's monetary policy committee is thought likely to raise interest rates by a quarter point to 4% when it meets next week. The nine-strong committee is concerned that the willingness of consumers to borrow for spending will lead to higher inflation unless action is taken to slow the rate of increase.

The consumer credit numbers are the first for some time to suggest that the economy is weakening rather than growing stronger. Output rose by 0.9% in the fourth quarter, unemployment has been falling and the Confederation of British Industry quarterly industrial trends survey this week showed manufacturing was on the mend.

Borrowing has been rising rapidly over the past two years as consumers have taken advantage of rising house prices and low interest rates. December's actual increase in consumer borrowing was the smallest since the end of 2000.

"While consumers are still spending, they are beginning to think twice about borrowing more money to finance their consumption," said Vicky Redwood of Capital Economics.

Mortgage borrowing grew less quickly in December than in November, increasing by only 1%. The number of mortgage approvals also fell by 3,000; they increased by 15% over the last six months.

"It would be silly to presume this is the start of a trend of consumers cutting back on borrowing," Ms Redwood warned.

Ross Walker, an economist at Royal Bank of Scotland Financial Markets, said: "I doubt this smaller rise in borrowing is the result of November's 25 basis-point rate hike - consumer confidence surveys and the retail sales data suggest consumers remain relaxed about November's rise in rates and the prospect of further increases."

Predicting a rate rise to 4% next week, George Buckley, a Deutsche Bank economist, said: "These numbers are quite volatile, and I don't think they are going to change expectations for a rate hike next week."