Consumer borrowing stagnates, but mortgage lending is reviving

Consumer borrowing stagnates, but mortgage lending is reviving

	Published : Thu, 05 Jan 2006 17:15 By : Amy Watts Print this Story

LONDON: British consumers are reluctant to borrow money, but mortgage lending is seeing a revival, according to Bank of England. The bank in a report said unsecured credit has risen by just 927 million pounds, the least increase in the last five years.

However, mortgage lending increased by 8.7 billion pounds, with 115,000 new mortgages approved in November alone, the highest since May 2004 and more than 50 per cent over the November 2004 figures.

Economists had forecast increases of 1.3 billion pounds for unsecured credit and 7.9 billion for mortgage lending. They reacted to the report saying the figures do not give any clue with regard to the interest rates.

The central bank has said in clear terms that it would wait for the Christmas shopping figures and the outcome of the New Year wage round before it draws any conclusions on the economy or for that matter on the direction of the inflation.

The bank had cut interest rates in August last to 4.5 per cent, which indeed has given a boost to the housing market. Many analysts expect the bank to effect another cut, as growth has slowed down and unemployment has risen.

A very recent study -- by the Chartered Institute of Purchasing and Supply -- had indicated that PMI for construction had fallen in December to 52.6 from 54.2 in November, even though it is still above 50, the threshold level indicating growth.

The bank's report also revealed that the country's debt has reached 1,148 billion pounds.

With regard to the sluggish growth in unsecured borrowings, analysts feel borrowers appear to be responding to the sharp rise in the cost of servicing debt.

In the past year-and-a-half, the gap between the average interest rate on credit card borrowing and the base rate had widened from 10.7 per cent to 12.1 per cent. Overdraft costs too have risen by more than 1 per cent since February. Some analysts appreciate such a cautious approach as they feel higher interest rates would lead to lower borrowings, which in turn will create higher savings by consumers.

That consumers are wary of spending was evident from surveys of shopper traffic during the Christmas-New Year season. While there was a marked increase in the number of shoppers on the Boxing Day, there was a sharp fall last week. This is a clear indication that consumers are still cautious in their behaviour, according to analysts.