Consumer credit drops as people rein in purchases
Personal borrowing dropped in February, as people hold back on spending amid the cost-of-living crisis.
Fresh Bank of England data showed that consumers borrowed an additional £1.4bn in February, compared to £1.7bn in January. This was split between £600m of borrowing on credit cards and £800m through other forms of consumer credit.
“Britons scaled back on borrowing and tucked more savings away in February as consecutive interest rate hikes have inflated credit interest rates,” said Myron Jobson, senior personal finance analyst at Interactive Investor.
“It has becoming increasingly expensive for many of those with a budget shortfall to borrowing money to make up the difference. People may also be shunning other forms of credit such as car financing until a time when they can afford the repayments. Meanwhile, there has been a reprieve in savings rate, which provides the impetus to top up on rainy day funds, for those who can afford to, as inflation remains stubbornly high.”
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The central bank’s data also showed that mortgage lending fell from £2bn to £700m in February. Excluding the pandemic, this is the lowest level of mortgage borrowing since April 2016.
However, net approvals for house purchases – an indicator of future borrowing – increased to 43,500 in February, from 39,600 in January. This was the first monthly increase in approvals for house purchases since August 2022.
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“Admittedly, a small rise in mortgage approvals, the first since August, suggests that demand may have already reached its nadir,” said Thomas Pugh, economist at accountancy firm RSM.
“But higher interest rates and falling real incomes will limit buyers’ ability to meet high prices. We expect a peak to trough fall in house prices of between five per cent and 10 per cent.”
Meanwhile, the annual growth rate of borrowing by large businesses fell by 2.7 per cent to 3.1 per cent in February, while for small- and medium-sized businesses it slumped from -3.7 per cent in January to -3.9 per cent in February.
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“The sharp drop in lending to the private sector suggests that banks were already curtailing lending, even before the latest issues in the financial sector,” said Pugh. “We estimate that the tightening in financial conditions around the recent turmoil is equivalent to a 25bps increase in interest rates.”