BBA's consumer credit slowdown likely to relieve Bank of England

UK consumer borrowing in the form of personal loans and overdrafts slowed in February, according to data from the British Bankers Association, which tied in with the slowing retail spending reported this week.

The BBA reported consumer credit showed annual growth in February of 6.6%.

However, total net consumer borrowing in February of £382m was down 23% on January to £89.7bn, as banks saw slackening in the annual growth rate for personal loans and overdrafts but stronger growth for credit cards.

Unsecured consumer credit had increased to £495m January after slowdowns in December and November from a peak of £586m in October. February's total was also down 29% from the combined amount of £536m borrowed in February 2016.

The net increase in personal loans and overdrafts slowed sharply to a 14-month low of £81m after rising to £355m in January from £217m in December.

On the upside for banks, net borrowing on credit cards rose to an 11-month high of £301m February from £140m in January and just £13m in December.

In a speech in mid-January, Bank of England Governor Mark Carney indicated the monetary policy committee would be closely monitor consumer dynamics over the coming months, saying: “How household spending evolves, and the inter-temporal trade-off that households strike, will be important considerations over the next year. The MPC will continue to monitor these dynamics.”

BBA managing director for retail banking Eric Leenders said consumers’ use of credit cards and personal loans reflected last month’s increased spending figures.

Business borrowing continued to be subdued, growing by 0.9% annually.

Said Leenders: “Businesses continue to exercise a cautious approach to borrowing, using cash reserves and alternative lending sources to finance their operations.”

Economist Howard Archer at IHS Markit said the BBA figures indicated an underlying slowdown in unsecured consumer borrowing from the peak levels seen around last October, "which ties in with the impression that consumers are becoming more cautious as their purchasing power is increasingly diluted by rising inflation" and would likely be of some relief to the Bank of England.

Earlier in the week, the Office for National Statistics revealed that retail sales were down 1.4% in the three months to February compared to the three months to November.

"It looks inevitable that the fundamentals for consumers will progressively weaken over the coming months with inflation rising markedly due to the weakened pound and companies likely increasingly looking to hold down pay to limit their total costs," Archer said.

"Indeed, it looks probable that inflation will move clearly above earnings growth over the coming months. Furthermore, the labour market also looks likely to come under mounting pressure despite its recent resilience."

He saw two opposing forces for consumer confidence and the need for unsecured credit: that, on the one hand, deteriorating fundamentals for consumers over the coming month may make people more cautious over borrowing, but on the other hand, that deteriorating fundamentals for consumers will likely increase the need for some people to borrow.