UK consumers borrow more in face of cost-of-living squeeze

FILE PHOTO: People queue for food in the financial district of Canary Wharf

By David Milliken

LONDON (Reuters) - British consumer lending rose last month at its fastest since May 2019 - boosted by a big rise in credit card borrowing as households face a cost-of-living squeeze - while the number of mortgage approvals fell to the lowest since June 2020.

The Bank of England data add to signs that the highest inflation in 40 years is hurting the economy and come as the BoE considers whether it should raise interest rates next week by more than it has in a generation to get inflation under control.

Annual consumer credit growth rose to 6.5% in June from 5.8% in May, its highest since May 2019, Friday's data showed.

Credit growth was boosted by a 1.781 billion pound ($2.16 billion) increase in unsecured lending in June - far above the forecast in a Reuters poll for a 1 billion pound rise. Credit card lending accounted for more than half of June's increase.

Normally faster credit growth is seen as a sign of a booming economy but - twinned with other indicators showing the weakest consumer confidence in almost 50 years - some economists said it showed consumers were struggling to cope with surging inflation.

"Households won't be able to fully offset the hit to their real incomes from high inflation this year, which is why we think the economy will soon slip into recession," Nicholas Farr, assistant economist at consultancy Capital Economics, said.

Debt charity StepChange said 18% of its users in June cited the rising cost of living as the main cause of their financial problems, the first time this had been listed as the top reason.

It also said the proportion of clients falling behind on electricity and gas bills was 28% and 23%, respectively, in June, higher than pre-pandemic levels of 17% and 13%.

The BoE data showed households' net deposits into bank accounts and similar deposits fell in June to the lowest since April 2018 at 1.9 billion pounds, down from 5.6 billion pounds in May.

Britain's housing market is also losing momentum. Like in many other Western countries, house prices surged during much of the COVID-19 pandemic as richer households sought more spacious homes.

However, Friday's data showed that the number of mortgages approved for house purchases sank to its lowest since June 2020, when property market activity was heavily restricted due to lockdown rules.

Mortgage approvals totalled 63,726 in June, falling from a downwardly revised 65,681 in May and below forecasts of a slight drop to 65,000 in the Reuters poll.

While consumers are feeling the pinch, companies seem less affected.

Businesses redeemed a record 5.8 billion pounds of corporate bonds and bought back 3.5 billion pounds of shares and 0.1 billion pounds of commercial paper - cumulatively, the biggest return of finance since July 2009.

($1 = 0.8222 pounds)

(Additional reporting by Andy Bruce and Muvija M; Editing by William Schomberg, Kirsten Donovan)