In May, UK consumers cut back on credit card borrowing because of fears of rising interest rates and a slowing economy as a result of a cost of living crisis.
Consumer borrowing fell to a four month low of 800 million in May, from 1.4 billion in April, according to monthly figures from the Bank of England. Half of all of the borrowing, 400 million, was in the form of credit card loans, and May's total figure was below a pre-pandemic average of 1 billion and under economists forecasts.
Nicholas Farr, from Capital Economics, said that households are beginning to exercise caution because of the recent plunge in consumer confidence and the cost of living in May. Consumer spending is struggling, and the economy will be very weak over the coming months, which adds to the reasons to think consumer spending is doing well. Some households are thinking twice before purchasing big ticket items because of the weakness in total unsecured lending. The Bank of EnglandBank of England is raising interest rates at its fastest pace since the 1990s to tackle inflation at a 40 year high in the face of a slowing economy. The Bank rate was increased by 0.25 percentage points to 1 per cent in May, the highest since early 2009. The economy is on course to have contracted in the three months to June, after a decline in GDP of 0.3 per cent in April, according to the Office for National Statistics.
In May, mortgages and household borrowing jumped, suggesting that homeowners may be aiming to lock in lower rates as monetary policy is tightened over the coming months. Mortgage approvals rose to 66,200 in May from 66,100 in the previous month, reflecting strong demand and rising prices in the housing sector. Mortgage borrowing was at 7.4 billion, up from 4.2 billion in April and above pre-pandemic averages.
More than 90 per cent of existing mortgage holders will not suffer from the impact of higher interest rates as they are on fixed-rate borrowing schemes. The rising inflation would affect housing demand later this year, according to Karim Haji, head of financial services at KPMG UK. He said that while strong demand for housing continues to boost prices, falling affordability could be a factor in the slowdown in the near-term, as higher interest rates are passed on to borrowers.
Samuel Tombs, who is a Pantheon Macroeconomics, said the economy was on course to slow as household expenditure was not keeping up with the rising cost of living. Households still aren't drawing on their savings or borrowing enough to maintain their level of real expenditure in the face of the huge shock to their real disposable incomes, Tombs said.
The average interest rate on personal loans fell to 6.49 per cent in May, which is less than the pre-pandemic level recorded in February 2020. Rates on credit cards increased slightly from 18.38 per cent to 18.08 per cent in April, also below 2020 levels.
Lenders that offer unsecured debt are caught between the need to be cautious and provide whatever support they can, such as payment holidays or larger overdrafts and credit limits, according to Haji.