Credit card borrowing grows amid soaring inflation

Consumer borrowing jumped in April after households turned to credit to fund their spending as the squeeze on incomes tightened, Bank of England figures show.

There was a £1.4 billion rise in borrowing on consumer credit, which is made up mainly of spending on credit cards and personal loans, when compared with March. The figure was higher than the pre-pandemic average and exceeded economists’ forecasts of a rise of £1.2 billion.

Households are increasingly relying on credit because inflation, at a 40-year high, is eroding the value of pay packets, one analyst said.

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Inflation jumped to 9 per cent in April, up from 7 per cent in March, after the 54 per cent increase in the energy price cap came into effect, increasing household energy bills by an average of £700 a year.

The rise in credit could also be a sign that households are not becoming as cautious about spending as they had in previous periods of high inflation, according to Nicholas Farr, assistant economist at the Capital Economics consultancy. “In the past it has been more typical to see households borrow less in aggregate when finances are tight,” he said. “So the healthy rise in credit also suggests that the cost of living crisis isn’t filtering through into much more precautionary behaviour by households.”

However, the households who developed “excess” savings during the pandemic remain unwilling to spend them. Many are still adding to their stock of savings, with a £5.7 billion rise in the amount of cash deposited into households’ bank accounts last month. It is well over the pre-pandemic average of £4.6 billion, but lower than the £6.6 billion in extra savings recorded in March.

The figures showed the first sign that higher interest rates are feeding through to demand for mortgages, with the number of mortgages approved falling to 66,000 in April from 69,500 in March.

The average rate for a new mortgage rose to 1.82 per cent in April, up from 1.5 per cent in December after the Bank of England raised interest rates four times over the period to reach a 13-year high of 1 per cent. Financial markets have predicted that the central bank will once again raise interest rates by 0.25 percentage points at the next meeting of its monetary policy committee in mid-June.

Karim Haji, head of financial services at KPMG UK, said the real impact in spending will be recorded in May because most households would not have received their energy bills until the end of the month.

“Growth in credit card borrowing remained at double digits in April, perhaps indicative of some households smoothing their consumption against the backdrop of lower disposable incomes,” he said.

“Lenders will be cognisant of a housing market that may be showing signs of cooling. Higher rates and falling real incomes are likely to dampen demand after a period of loose monetary policy. In the case of consumer and mortgage lending, banks are tracking the data even more closely than usual for the early signs of distress, to protect both themselves and households.”

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Credit card borrowing grows amid soaring inflation