First the good news: U.K. lenders expect to restrict the availability of unsecured credit to British consumers. Now the bad news: U.K. lenders expect to restrict the availability of unsecured credit to British consumers.
Dropping Like a Stone
“How has the availability of unsecured credit provided to households changed?”
Source: Bank of England credit conditions survey
The contraction in credit, both actual and anticipated, at least shows banks are paying attention to the risks posed by consumer borrowing. The Bank of England’s Financial Policy Committee warned last month that banks could suffer greater losses from defaults on consumer loans than they’re currently anticipating should the economy suddenly stumble:
Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn.
The risk, though, is that a credit squeeze spells disaster for consumer confidence, which had recently bounced modestly after dropping in the wake of last year’s vote to leave the European Union. That in turn could hurt retail sales, which have perked up in recent months and climbed by a healthy 2.8 percent in August.
How Fragile We Are
Consumer confidence about the economy has declined since the Brexit referendum
Source: GfK via Bloomberg
All of which puts next month’s Bank of England monetary policy decision into even sharper focus. The futures market currently puts the likelihood of an interest rate increase on Nov. 2 at better than 76 percent; but as Gadfly warned on Tuesday, figures on third-quarter growth and August wage data between now and then could easily undermine that hawkish view.
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