BoE credit figures show consumers still borrowing to smooth out spending

Money and credit figures from the Bank of England showed levels of consumer lending remained little changed, with no dramatic news to derail a likely nudge higher to interest rates later this week.

Mortgage approvals for house purchases dipped to 66,232 in September from 67,232 amid tepid housing demand at present, but was slightly more than the consensus forecast of 66,000.

There was a £1.6bn annual rise in consumer credit in September following a £1.8bn increase in August, with the annual growth rate remaining broadly unchanged since June, at around 10%.

Growth in net unsecured credit in the third quarter, at £4.6bn, was down slightly on the £4.7bn rise in the second, which economists suggested meant unsecured credit financed 1.5% of households’ purchases in both quarters.

Growth in the broad money supply slowed further in September, with year-on-year growth in households’ broad money holdings falling to 2.9% in September, below the rate of CPI inflation for the first time since March 2012.

Year-over-year growth in private non-financial corporations’ broad money holdings also declined, to 7.8% from 9.0% in August.

The three-month annualised rate of lending to non-financial firms on the M4 measure of money excluding intermediate other financial corporations - the Monetary Policy Committee's preferred measure - dropped to 2.0% from 2.8%.

September’s money and credit figures provides another reason to think that the economy should be able to hold onto a decent amount of momentum in the near term, said economists at Capital Economics, judging the solid rise in consumer credit suggested households are "still confident enough to borrow in order to smooth their consumption while their real incomes are being temporarily squeezed".

"With credit growth only dipping from 10.0% to 9.9% y/y in September, the latest figures will do little to assuage policymakers concerns about financial stability risks. As a result, annual growth in overall bank lending to the real economy held steady at 3.9% in September. As a result, there doesn’t appear to be anything in these figures that would prevent the MPC from raising interest rates on 'Super Thursday'."

Pantheon Economics felt the numbers provided "more evidence that the economy still is losing momentum", that credit is likely to drag on growth in households’ spending and that "the fall in consumer confidence over the summer points to a pull-back in spending on big-ticket items ahead".

The Bank of England’s Q3 Credit Conditions Survey, released earlier in October, showed that the largest majority of lenders since 2008 plans to restrict the supply of unsecured credit over the next three months.

Although household incomes have been boosted by the process of refinancing maturing fixed-rate mortgages at lower interest rates, the effective interest rate will rise over coming months, Pantheon said, especially if the MPC hikes rates this week.

"At least future rate rises will have a smaller direct impact on the economy than in the past, given that the ratio of mortgage debt to incomes has fallen and most of this debt now is fixed-rate. Even so, higher rates will be an unhelpful influence at a time when the economy still is struggling."