Consumer borrowing is rising again, says Bank of England

UK households and businesses continued to hoard cash in June, but the pace of increase slowed, according to Bank of England data that shows consumer borrowing rising again while businesses are taking on smaller amounts of debt.

Cash holdings by companies and households rose by £16bn, down from a monthly average increase of £53bn between March and May, the central bank said — adding that this took the increase since March to more than the cumulative total for most full years.

Businesses raised an extra £10.7bn of debt in June, largely from financial markets. But net business borrowing from banks was close to zero, with significant repayments by large companies offsetting continued borrowing by small and medium-sized enterprises, which were drawing down loans arranged through the government’s Bounce Back scheme.

“The immediate rush for cash has slowed,” said Paul Dales, chief UK economist at the consultancy Capital Economics, although he added that even with borrowing returning towards more normal levels, “businesses are now lumbered with much more debt”.

Households’ net borrowing rose for the first time since March, with the entire £1.8bn increase created by a return of activity in the housing market.

Approvals of mortgages for house purchase rose from a record low of 9,300 in May to 40,000 in June — higher than analysts had expected, although still well below the pre-pandemic level of 73,700.

However, consumer credit data suggest that consumers remained cautious about spending as the economy began to reopen: gross borrowing picked up month on month, but on a net basis, consumers were still paying off debt, albeit with a net repayment of less than £0.1bn — down from an average repayment of £3.1bn over the previous three months.

Kallum Pickering, economist at Berenberg, said the data pointed to easing pressures on business and a recovery for households. “The business sector has sufficient cash balances to avoid a damaging avalanche of sudden defaults . . . On the household side, building confidence will encourage consumers to reduce their cash balances,” he said.

Other economists were more cautious.

“On paper, the potential exists for a period of strong spending, fuelled by households running down their accumulated savings,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics. But he added that rising unemployment, and the prospect of mortgage holidays and government wage support coming to an end, would lead households to hoard savings rather than spend them.

“We shouldn’t make the mistake of thinking that means that household finances aren’t under stress,” said Peter Tutton, head of policy at the debt advice charity, StepChange, which has seen a rising trend in clients citing coronavirus as the reason for their debt problems.

Businesses would also seek to hold on to cash, he said, given trading losses, looming debt repayments and uncertainty about a second wave of the virus.

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