Warnings fail to halt record borrowing

Consumers have dismissed two interest rates rises from the Bank of England and a series of warnings about the dangers of stacking up debt to borrow at a record rate, according to new figures.

Opposition MPs warned that the economy was dangerously reliant on the housing market boom continuing after the Bank released figures showing mortgage lending grew by 14.5% in the year to February, the fastest annual rate in nearly 10 years.

Consumers added a further £10.7bn to their debts in February. Analysts estimate households owe the equivalent of 125% of their after-tax income, up from 90% in 1998.

The Bank's monetary policy committee (MPC) has already voted twice for higher rates since November, taking rates to 4% from their 48-year low of 3.5%. Further rate rises by the summer appear inevitable.

"The latest borrowing figures will do nothing to reassure the MPC that households are taking any notice of its warnings over the dangers of accumulating too much debt," said Simon Rubinsohn, chief economist at city analysts, Garrards.

"Nor do they appear to have been influenced by the tightening in policy seen to date. This strengthens our conviction that a further hike in rates is likely as early as next week's MPC meeting."

The new year surge in house prices is forcing buyers to stretch their finances to the limit to afford a mortgage, analysts said. The borrowing total is being boosted by existing homeowners withdrawing equity from their house value.

Mr Rubinsohn said the figures suggested consumers may have borrowed as much as £14bn against the value of their houses in the first quarter in the year, which would set a record. Some consumers are paying off more expensive credit card debt by extending mortgages, but others appear to be spending the extra cash.

Vincent Cable, the Lib Dem Treasury spokesman said: "This rise in lending comes on the back of an unsustainable house price bubble. Large numbers of people are gambling on the house price boom - a gamble they may regret if house prices start to fall or interest rates rise."

Mr Cable said Gordon Brown had missed an opportunity in this month's budget to rein in lenders prepared to let households go dangerously into debt. "The Bank of England is caught between dealing with the weaknesses in the economy and curbing the consumer boom.

"The budget failed to take responsibility for the level of lending by banks," he said. "It is time the government took action to protect ordinary homeowners against irresponsible lending."

Conflicting messages from the Bank may explain why households appear deaf to the warnings. Last week Sir Andrew Large, the Bank's deputy governor, said rising consumer debt was a "credible threat" to the economy which at some point could force a painful round of belt-tightening.

But Stephen Nickell, an external member of the MPC, said: "By and large people with mortgages are able to repay them and are able to cope with the interest payments."