U.K. Consumers Rein in Borrowing as Cost of Living Crisis Bites

(Bloomberg) -- U.K. consumers unexpectedly scaled back borrowing and tucked away extra savings in January as households braced for a cost of living crisis.

Borrowing using credits cards, personal loans and overdrafts totaled 608 million pounds ($805 million), according to Bank of England figures published Tuesday. That was down from 817 million pounds in December and below the average in the second half of 2021.

With inflation accelerating, there had been speculation that some households would be forced to take on unsecured credit to pay the bills. Instead, consumers appeared keen to get their finances in order ahead of a further shock in April, when energy bills and taxes are due to rise sharply.

In a sign of defensive behavior, consumers added 7.7 billion pounds to their cash deposits, the biggest increase since September. The level of savings was significantly above pre-pandemic averages, suggesting precautionary action during the omicron wave.

The slowdown in consumer borrowing came despite a strong rebound in retail sales during the month, suggesting little of that spending was financed on credit.

For now credit remains cheap amid strong competition between lenders. Separate BOE figures showed the effective interest rate on new personal loans fell 6 basis points in January to 6.21%, while the rate paid on new mortgages was unchanged at 1.58%.

However, borrowing is almost certain to get more expensive, with the central bank on course to raise interest rates several times this year to rein in the fastest inflation in three decades.

“With consumer confidence falling to its lowest level since the start of the pandemic in February and interest rate hikes looming, the outlook for borrowing is far from bright,” said Adam Hoyes, an economist at Capital Economics.

Mortgage figures suggest the housing market remained strong, with lending rising more than forecast at the start of the year. Approvals for house purchase rose to 73,992, the highest since July last year. The amount lent rose to 5.9 billion pounds, the most since September.

“There are headwinds ahead,” said Andrew Montlake, managing director of mortgage broker Coreco. “Interest rates are rising, tax hikes are on the way, energy bills are increasing and food prices are accelerating. It's likely that people's borrowing power will wane.”