Squeezed UK households tap into savings at record pace

By Andy Bruce

LONDON (Reuters) -British households withdrew money from their savings in May at a record pace as a jump in interest rates slowed the rate of their borrowing, Bank of England data suggested on Thursday.

Households drained a net 3.8 billion pounds from savings - the biggest outflow since records started 25 years ago - driven by withdrawals from bank accounts and only offset slightly by inflows into the government's National Savings and Investment products.

Unsecured lending to consumers rose by 1.144 billion pounds ($1.45 billion) in net terms last month after a 1.513 billion-pound increase in April. It marked the smallest net increase this year, the BoE data showed.

A Reuters poll of economists had pointed to net consumer credit lending of 1.5 billion pounds in May.

The drawdown of savings probably reflects the higher cost of living as the BoE battles the highest rate of inflation among major advanced economies, rather than signalling confidence about the economy and more willingness to spend.

Consumer advocates have criticised banks for failing to pass on the rising base rate to many savers, while being quick to raise rates on borrowing.

"We suspect (consumer lending) will decline further in the coming months as the growing drag from higher interest rates may mean households cut back," said Ashley Webb, economist from consultancy Capital Economics.

British consumers maintained the pace of their spending in recent months despite the squeeze on their incomes, with retail sales rising unexpectedly in May.

MIXED SIGNALS

But the economy is yet to feel the bulk of the impact from successive interest rate hikes since late 2021, with more still in the pipeline, and many analysts are now predicting a recession.

BoE Governor Andrew Bailey said on Thursday he was "interested" that investors think the peak for interest rates will be short-lived, given the persistence of inflation.

A Reuters poll of economists this week showed Bank Rate is expected to peak at 5.50% next quarter. Many investors expect it will top 6% later this year.

Thursday's data pointed to mixed signals from the housing market, with some major lenders on Thursday announcing more increases in borrowing costs - taking the average rate on mortgages offered via brokers above 6% in many cases.

British lenders approved 50,524 mortgages in May up from a revised 49,020 in April but down from around 66,000 in May last year, before the rise in borrowing costs began to weigh on the housing market.

The Reuters poll had pointed to approvals of around 49,700.

"Despite mortgage approvals increasing, there remains a serious concern that the UK is headed for a 'mortgage shock' as homeowners come to the end of their pre-inflation deals," Paul Heywood, Chief Data & Analytics Officer at Equifax UK, a credit reporting agency, said.

"While consumers in the UK have done remarkably well to manage their finances thus far, we are seeing signs of emerging stress," he said.

The value of net mortgage lending contracted in May by 92 million pounds, following a 1.466 billion-pound fall in April.

It marked the first back-to-back falls in net mortgage lending since records began in 1986.

($1 = 0.7908 pounds)

(Reporting by Andy Bruce; Editing by William Schomberg, Emelia Sithole-Matarise and Toby Chopra)