Britain’s hard-pressed consumers are increasingly turning to credit cards, overdrafts and loans to support their spending, according to the Bank of England.
Threadneedle Street’s monthly report on money and credit found that the outstanding amount of unsecured consumer credit rose by 10.3% in the year to May, five times as fast as the growth rate of earnings.
The size of the increase is likely to add to the Bank’s concerns – flagged earlier this week – about the precarious financial position of many individuals.
Data released by the Bank provided evidence of a slowdown in the housing market, with lending secured against a home rising by 2.9% to £1.338tn in the 12 months to May.
But unsecured consumer credit continued to grow strongly and rose by £1.7bn during May alone – faster than its average of £1.5bn in the previous six months.
Credit card borrowing is growing at an annual rate of 9.1% while other loans and advances rose by 10.9%.
Howard Archer, the chief economic adviser to the EY Item Club, said: “It may be that the heightened squeeze on consumer purchasing power is increasing the need for some consumers to borrow.
“The Bank of England will be far from happy with the May consumer credit data, and it could bolster the case for a near-term interest rate hike to try to curb consumers’ readiness to borrow.”
The latest income tracker from the supermarket chain Asda found that the spending power of UK households fell by 1.9% over the past year, the sharpest decline in four years.
Asda said families across the UK had average discretionary income of £194 in May, £4 a week lower than in the same month last year. Families with the lowest incomes saw the biggest reduction in disposable income.
Living standards have been squeezed in recent months because inflation has been running at 2.9% while earnings have been rising at 2.1%.
Ruth Gregory, the UK economist at Capital Economics, said the Bank of England’s data suggested that households remained confident enough to increase borrowing to help smooth consumption, in the face of the squeeze on their real incomes.
She added: “Of course, this 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.”