Consumer borrowing increased at a slower rate than expected last month as the Bank of England’s interest rate hikes hit demand for new loans.
Bank of England figures out this morning showed that the monthly increase in consumer credit was £1.2bn, £400m less than the £1.6bn increase seen in June.
Although borrowing on credit cards remained more or less constant, new borrowing for other forms of consumer credit – such as motor finance and personal loans – fell to £600m from £1.0bn the month before.
Ashley Webb, UK economist at Capital Economics, said the figures show that “the drag from higher interest rates is starting to weigh more heavily on activity.”
In an attempt to bring down persistently high inflation, the Bank of England has hiked interest rates 14 times in a row to a post-financial crisis high of 5.25 per cent.
This has chilled demand in the economy by making borrowing more expensive. So far, economists have been surprised by the resilience of consumers, both in the UK and around the world, to the interest rate hikes.
Higher rates also reward savers and the data suggests that consumers are increasingly seeking out better rates on their deposits.
Some £10.2bn was withdrawn from interest-bearing sight accounts in July with £10.1bn moving into interest-bearing time accounts, up from the £6.5bn moved into those accounts in June.
Time accounts generally offer higher rates of interest than sight accounts because withdrawals are restricted.
High street banks have come under intense political and regulatory scrutiny over recent months for failing to pass through interest rate hikes to consumers on easy-access accounts. The figures imply consumers are taking matters into their own hands and parking away money for longer.
Net flows into ISAs also increased to £4.3bn, up from £2.9bn in June, Bank of England data showed.
Overall household deposits increased by just £400m in July, down from a £3.8bn increase in June. “This may suggest that households’ finances are becoming more stretched,” Webb said.