Bank of England: consumers turn to loans, credit cards and overdrafts

Data shows 3.5% annual increase in consumer credit, showing shoppers' willingness to turn to costly borrowing

Consumer credit grew at its fastest pace since December 2008 last month, as households resorted to personal loans and overdrafts to maintain their standard of living in the face of falling real wages.

Data from the Bank of England, released on Friday, show that the 3.5% annual increase in consumer credit, which includes borrowing on overdrafts, credit cards and unsecured loans, was the most rapid increase for four-and-a-half years.

The fresh evidence of consumers' willingness to turn to costly borrowing on personal loans – which charge average rates of more than 7%, compared with the Bank's base rate of 0.5% – will increase fears that the UK is experiencing an unsustainable, "Alice in Wongaland" recovery, a phrase coined recently by the economist Ann Pettifor.

Mortgage approvals for house purchase also rose, to 60,624, according to the Bank, the highest level since March 2008, when the worst of the financial crisis was yet to hit, in the latest sign that the housing market is picking up.

David Tinsley of BNP Paribas, said: "The Bank of England's Inflation Report discussed that it was likely that approvals would rise 'above 60,0000 a month by the end of the year'. On today's evidence, this is happening at least as fast as that view. A level towards 70,000 by year-end looks achievable."

Improved mortgage availability has helped prices to rise in many parts of the country, and Nationwide, the UK's biggest building society, said separately on Friday that house prices rose by 0.6% in August.

Nationwide's latest snapshot of the property market, based on mortgages it approved over the month, put the average price of a home at £170,514 – more than £8,000 higher than in January but still well below the 2007 peak.

Coupled with the turn in the housing market, the news that personal borrowing is increasing more rapidly will fuel the debate about whether the economic recovery is being built on solid foundations.

Consumer credit increased by £600m in July, up from £400m in June. The bulk of the increase was in "other loans and advances," which includes overdrafts and personal loans. These were up £500m, compared to an average monthly increase over the previous six months of £200m.

The Bank's monthly series shows a sharp turnaround earlier this year, from repayments, to a growing pace of lending growth — though 3.5% remains weak by historical standards.

Consumers may be responding to signs that the economy is picking up, and reassurance from Bank of England governor Mark Carney that interest rates will remain at 0.5% for up to three years.

At his first major speech earlier this week, the governor said he would keep a close eye on the risks of a housing or credit bubble.

Business lending also staged a small rise, of £500m, in July, according to the Bank's data, although small and medium-sized enterprises (SMEs) are still failing to benefit, despite the government's Funding for Lending Scheme, which is partly aimed at channelling lower-cost borrowing to smaller firms. Lending to SMEs fell, by £900m, in July, and total lending to businesses was 3.3% lower than the same month a year earlier. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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