Borrowing to rise as consumers grapple with surging inflation

The latest money and credit figures suggest that consumers are increasingly borrowing more to protect their lifestyles from the surge in inflation. We expect to see higher borrowing and lower saving rates over the rest of the year as the cost-of-living crisis starts to bite.

Net consumer credit rose by £1.9bn in February, almost double its pre-pandemic average of £1bn. Most of this rise (£1.5bn) was due to higher credit card spending. What’s more, households deposited about £5.1bn in bank and NS&I accounts in February, lower than the average monthly net flow of £5.5bn during the 12-month pre-pandemic average.

Normally, a rise in consumer credit is a good indication that consumption is growing strongly because it tends to expand when the economy is good. People feel confident enough to borrow and splurge on big ticket items, such as cars. This time may be different, though.

A rise in consumer borrowing over the next year is more likely to be a sign that high inflation is driving consumers to maintain their lifestyles by borrowing. Right now, household balance sheets are in a much stronger position than before the pandemic. Households paid off about £25bn of consumer credit and accrued excess savings of around £250bn during the pandemic, and the early evidence suggests that consumers are propping up their spending by borrowing more and saving less. To put that savings amount into context, UK households spent about £32.4bn on electricity and gas in 2020, so a 50% rise would see them spending an extra £16bn. If households dip into their savings to counter rising prices, or the government acts to support households, then the impact on GDP growth may be smaller than we have assumed.

Housing market starting to cool

Meanwhile, it appears as though some of the heat is starting to come out of the housing market. The £4.7bn rise in mortgage loans issued and 70,972 of mortgage approvals were both higher than their pre-pandemic averages of £4.1bn and 65,700. But they were both weaker than the £5.9bn and 73,841 registered respectively in January. This doesn’t seem to be a result of much higher mortgage rates as, despite Bank Rate having risen by 65bps, the average new mortgage rate has increased by only 9bps and the average existing mortgage rate has risen by only 2bps due to the high proportion of fixed rate mortgages.

However, the housing market will continue to slow under pressure from the cost-of-living squeeze and as higher interest rates gradually push up the cost of mortgages.