Bank of England rate hike expectations plummet with no sign of a slowdown in consumer borrowing boom

Jasper Jolly
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British consumers have taken on more debt in response to rising inflation (Source: Getty)

Household expectations of an interest rate rise from the Bank of England fell steeply this month, with no signs the recent boom in consumer borrowing will slow.

The proportion of households expecting the Bank to hike interest rates during the next year fell from 48 per cent in July to only 33 per cent in August, according to a survey by data firm IHS Markit.

That represented the lowest proportion of survey respondents expecting borrowing costs to rise for a year.

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The combination of low interest rates and falling purchasing power has seen households turn to borrowing in recent months to sustain their living standards. Markit’s index of unsecured borrowing came in at 52.1, well above the 50 reading which indicates no change in borrowing. It has remained above 52 throughout 2017, easily the strongest period of expansion in borrowing since 2014.

The increase in consumer borrowing has been driven in part by low unemployment, even as spending power has become weaker, according to Paul Hollingsworth, an economist at consultancy Capital Economics.

The prospect of bank interest rates remaining at record lows, which keeps the price of consumer borrowing down, adds another reason for consumers to be less fearful of taking on more debt, potentially "storing up trouble for the future," Hollingsworth added.

The Bank of England has expressed concerns over booming levels of unsecured consumer debt, which crossed the £200bn mark in June for the first time since the financial crisis.

The surge in lending in certain parts of the consumer finance sector, such as auto finance and other personal lending, led the Bank to raise concerns over "pockets of risk" in the UK economy which could potentially cause damage to the stability of the financial system.

The rise in debt levels in recent months has accompanied surging inflation at a time of relatively stagnant pay growth.

Read more: Fears rise on £200bn debt pile as Moody's warns Britons borrowing too much

Total wages grew by only 2.1 per cent in the year to June, while in the same period prices rose by 2.6 per cent, according to the Office for National Statistics. Prices have risen faster than wages consistently since February, as the effects of the devaluation of sterling feed through.

Sam Teague, an economist at IHS Markit, said: “Households continued to report a greater need for unsecured borrowing to bridge the gap between pay growth and inflation.

“The sharp drop in the number of people expecting a Bank of England base rate rise in the near future provides an indication that households expect lending conditions to remain accommodative.”

While the decline in Markit’s measure of overall household finances moderated in August, the index remained at 43.5, far below the 50 mark and still weaker than the average seen over 2015 and 2016. In July the index showed household finances deteriorating the most in three years.

Read more: Bank of England demands loans information from lenders amid debt concerns

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