26th October 2016

Consumers taking advantage of low rates for short-term borrowing

Written by Rebecca Harding, Chief Economist

When the Bank of England reduced interest rates at the beginning of August, its intention was to increase the amount which consumers and businesses were borrowing. The Term Funding Scheme it launched allowed banks to pass the low interest rates on thereby providing all the necessary ingredients for demand in the economy, and indeed inflation, to pick up over time.

September’s High Street Banking data are beginning to show that the effects of this policy are largely being felt in short-term borrowing. Consumer credit is growing at its fastest rate since December 2006, driven by strong demand for personal loans and credit cards. Consumers are increasingly using short-term borrowing to take advantage of record low interest rates. This trend has accelerated slightly since the Bank of England cut rates in August with the annual growth in personal loans and overdrafts now at 7.2% and overall consumer credit growth at 6.7%. Retail sales flattened in September and credit card borrowing remained steady at 6.1% year-on-year growth (Figure 1).

Figure 1

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Source: BBA

Mortgage approvals picked up slightly this month showing a 2.6% year-on-year growth. However, the housing market continues to shows signs of underlying weakness. House purchase approvals were 15% lower than in September 2015 and re-mortgaging at a similar level to this time last year despite having picked up in the first nine months of this year. It is not possible to conclude that the increase in net mortgage approvals was due to the change in interest rates as this type of decision tends to be longer term and therefore the full impact of lower rates may not yet been fully fed through into the system.

Finally business borrowing decreased slightly again in September. This may be in part down to uncertainty following the EU referendum and corroborates a trend that we have seen for some months now. As with mortgages, there is a longer time lag behind corporate investment decisions so it may take longer for the effect of the interest rate cut to filter through to such borrowing. However, capital market issues increased by £3.9 billion in September suggesting that businesses may be returning to this mechanism for funding growth following a slight drop in the immediate aftermath of the referendum vote.

Personal and business deposits continue to grow and reflect the fact that the incentives for longer-term saving are weak in the current low interest rate environment. In fact business deposits grew at an annual rate of 4.6% to September 2016 and this compares to an annual rate of 3.8% in August and 2.7% in July. This suggests that companies may be beginning to build up their reserves as we head into the uncharted waters of Brexit.

There is no long term evidence in the data this month that there has been a marked increase in borrowing directly associated with lower rates, although consumers are using short term means to borrow more. Instead, the underlying weaknesses in housing are evident and the data do not suggest a confident business sector, despite the fact that the PMIs recovered in September (Figure 2 and Figure 3).

Figure 2

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Source: BBA

Figure 3

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Source: BBA

September’s High Street Banking statistics still exhibit the mixed messages and data noise that we are seeing in other economic data. It is still too early to assess the long term impact of either Brexit or looser monetary policy.

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