British household borrowing leapt in May, Bank of England data revealed on Thursday, highlighting the Bank's recent concerns about the rising rate of consumer debt.
Data from the central bank showed rises in consumer credit and loans to individuals, including secured and unsecured lending.
Net lending to individuals jumped to £5.3bn in May, up from £4.3bn in April, and confounding analysts' expectations of a dip to £4bn.
Meanwhile, growth in consumer credit in May was also much higher than forecast, rising to £1.732bn from £1.483 in April – the highest level since last November, and well above the six-month average of £1.4bn which analysts had estimated it would drop back to.
"This suggests that households remain confident enough to increase borrowing to help smooth consumption, in the face of the squeeze on their real incomes," said Ruth Gregory, UK economist at Capital Economics.
Financial policy committee
The BoE's financial policy committee (FPC) said on Tuesday that consumer credit had grown by more than 10% in the past year.
Recent data has shown that as inflation surged to 2.9% in May, income growth slowed to 1.8% in April creating a gap that appears to have been filled by growth in borrowing.
Credit card debt dipped, slowing to £0.4bn in May from £0.6bn in the previous month. The fastest growth in borrowing was in auto financing. Car loans and other borrowing sped up to £1.3bn from £0.9bn.
Banks to beef up finances
The BoE has demanded banks beef up their finances against the risk of bad debt by setting aside a combined £5.7bn in the next six months to safeguard against future economic shocks that could send borrowers into default.
"Lenders may be placing undue weight on the recent performance of loans in benign conditions," the FPC warned, suggesting banks had become over-confident in the current favourable economic environment.
Gregory at Capital Economics continued: "Today's data will do nothing to allay policymakers concerns about the recent rapid increases in unsecured lending and strengthens the case for the Financial Policy Committee to act to address this issue at its next meeting in September."
Meanwhile, mortgage approvals also accelerated in May, rising to 65,202 from 65,051 in April. Analysts had expected approvals to dip to 64,000.
The Bank of England is now put in a difficult position. Raising rates would help address rising inflation and would cool credit growth.
However, low levels of wage growth and high levels of credit could put consumers in danger of default in a higher interest rate environment.
“While raising interest rates may put a lid on inflation, it has the ability to negatively impact the fragile UK economy while also denting business confidence and pressuring consumers,” said Lukman Otunuga, analyst at FXTM.
Nevertheless, the data helped boost the pound, which climbed 0.4% against the dollar to $1.2971 and 0.1% versus the euro to €1.1373.