Debt figures damage case for rate cut

Prospects for a cut in interest rates today receded as consumers showed undiminished appetite for debt, according to figures from the Bank of England.

Consumer credit grew a stronger-than-expected ?2bn in September, 15.8% higher than a year before and the strongest annual rate since April 1999. The figures surprised economists, who had expected a modest slowdown in lending after the summer surge.

The continuing buoyancy of the consumer sector poses a dilemma for the Bank of England as it prepares for its November interest rate meeting next week. Earlier this month, three of the nine members of the Bank's monetary policy committee (MPC) voted in favour of a pre-emptive cut because of the weak global recovery. Today's figures should give more ammunition for those cautioning against a rate cut.

"The latest data from the Bank of England clearly illustrate the danger of cutting rates further," said HSBC economist John Butler. "The consumer's appetite for borrowing is showing few signs of waning. Now around 10% of total consumer spending is being financed through borrowing. That is near the absolute peak of the late 1980s experience."

The Bank has now held interest rates at 4%, their lowest in almost 40 years, for 11 months, fuelling a boom in consumer spending and house prices that are rising over 20% a year. Today's lending figures amply illustrated the effect of low rates on mortgages.

Mortgage lending rose ?6.9bn last month, an annual increase of 12.4%, the highest since records began in 1993. There were 117,000 new mortgage approvals in September compared with a recent peak of 125,000 in April but above the average of 111,000 in the three months to August.

The value of all loans approved was ?20.7bn, ?1.6bn higher than the average in the three months to August.

"Household appetite for borrowing is still extremely strong," Mr Butler said. "The question the MPC needs to ask is do they really want to risk encouraging this appetite further? We still see any near-term cut in the UK as unlikely."