Debt mountain grows

Britain's consumers shrugged off the heatwave to keep up their borrowing spree in August, stacking up an extra £1.6bn of debt on credit cards and overdrafts, official figures showed yesterday.

As a separate survey showed consumer optimism holding firm in September, the robust pace of growth in consumer credit last month, to a level 1% up on July and 13.7% on August 2002, underlined concerns that borrowers are overstretching themselves.

"These figures will do little to calm fears that the strength of household borrowing means that consumers are continuing to raise their debts to unsustainable levels - with the implication that the danger is increasing that households are setting themselves up for an abrupt adjustment," said Vicky Redwood, UK economist at Capital Economics.

Some members of the Bank of England's monetary policy committee, which meets next week to decide interest rates, have recently expressed worries about consumer debt levels, which surged as interest rates have been cut nine times to their 48-year low of 3.5%, from 6% at the beginning of 2001, to ease the pain of the global downturn.

Some comfort for policymakers nervous about the pace of borrowing came from news that mortgage lending eased slightly in August, according to yesterday's figures.

Homeowners borrowed an extra £7.7bn against their properties in August, down from £8.2bn in July, the Bank of England said. Total debt, which includes both mortgages and consumer credit, rose by £9.3bn, down from £9.7bn in July.

However, analysts pointed out that the number of new mortgages approved surged from 112,000 in July to 120,000, the highest level since October last year. Mortgage approval figures give an indication of future demand for property, and analysts said August's total supported the idea of a rebound in the housing market after the end of hostilities in Iraq.

Simon Rubinsohn, chief economist at City brokers Gerrard, said the figures showed that the average household owes 123% of its income.

"The underlying picture regarding household borrowing remains upbeat with little real evidence that consumers' appetite for accumulating debt is diminishing," he said.

Borrowing has expanded strongly as consumers have taken advantage of historically low interest rates. But minutes of the MPC's last rate-setting meeting reveal that some members believed debt levels had become a growing cause for concern.

Separate news that consumer optimism was steady between August and September suggested households see little reason to rein in their borrowing.

The monthly confidence barometer produced by Martin Hamblin GfK for the European commission held at minus 3 this month, the same reading as for August.

However, respondents did signal that they felt less inclined to make substantial purchases than they did a month earlier.

Martin Hamblin's director, Roger Wright, said confidence appeared to be stabilising after plunging sharply in the run-up to the war in Iraq. Consumers' optimism about their personal finances rose from plus 9 in August to plus 11 in September, according to the detail of the survey.

With the office for national statistics due to make sweeping revisions to its assessment of the economy when it publishes new growth figures this morning, the MPC is widely expected to leave interest rates on hold next week until a clearer picture emerges.