Consumers repay record amount of debt

A shopper carries Primark bags in Blackpool, November 14, 2009.

LONDON (Reuters) - British households repaid a record amount of unsecured credit in October, chipping away at the 228 billion pound debt mountain built up over a decade of easy lending before the credit crunch.

The Bank of England data released on Monday showed credit conditions are still tight economy despite the central bank's 200 billion pound quantitative easing programme, with a fall in a key measure of money supply and mortgage approvals staying well below pre-crunch levels.

Outstanding consumer credit contracted by 579 million pounds last month, the fourth successive decline. The contraction was almost three times bigger than economists had expected and well over September's 299 million pound net repayment. Click here for a graphic on consumer credit: r.reuters.com/kuf24g.

Since July consumers have repaid more than 1.3 billion pounds of unsecured debt as tight lending criteria have limited households' ability to borrow more, despite government exhortations to banks to ease up credit.

A rising household saving rate means the Bank expects economic recovery in Britain to be driven by exports rather than the consumer demand that underpinned growth in the years leading up to the credit crunch in mid-2007.

"The Bank has identified the need for consumers to improve their balance sheets as a major factor that could limit consumer spending, and hence economic growth, for some considerable time to come," said Howard Archer, economist at IHS Global Insight.

Consumer sentiment fell in November for the first time since January, a separate survey by GfK NOP showed on Monday.

FALLING MONEY SUPPLY

In an attempt to mitigate the sharp fall in domestic demand in Britain's longest recession in at least 50 years, the Bank has cut interest rates to a record low and bought more than 175 billion pounds of gilts with newly created money.

But M4 broad money supply figures that the Bank released alongside the credit data show little evidence that these purchases have affected money holdings outside parts of the financial sector.

A subcomponent often cited in Bank policy minutes -- M4 excluding intermediate other financial corporations -- shrank at an annualised rate of 5.3 percent in the three months to October, compared to a 0.7 percent fall from July to September.

Overall M4 -- which includes holdings by intermediaries such as clearing houses -- rose 10.8 percent in the year to October.

"The underlying position looks weak," said Ross Walker, economist at Royal Bank of Scotland. "There's not much evidence that QE is boosting those real economy money and credit aggregates. If it is working, it's through financial sector channels rather than through households and non-financial companies."

Bank policymakers have argued that the policy of buying assets with newly created money is working well in that it has raised the price of those assets and brought down borrowing costs for large companies.

HOUSING EDGES HIGHER

Mortgage lending continued to edge higher after hitting its low-point for the cycle around a year ago. The total number of mortgages approved for house purchase rose to 57,345 from 56,205 -- in line with economists' forecasts but barely half the level when house prices peaked in the autumn of 2007.

Net mortgage lending rose 922 million pounds in October after an 898 million pound rise in September, again in line with forecasts but just a tenth the sum banks advanced in the boom.

These figures suggested that the monthly rises in house prices recorded in most surveys in the second half of 2009 may run out of steam next year, said Hetal Mehta, economist for the Ernst & Young ITEM Club.

"Although today's figures point to some improvement in the mortgage market, particularly on the approvals side, we are still a long way off from seeing a sustainable turnaround in the fortunes of the housing market," she said.

"The recent house prices increases are built on shaky foundations and have been driven by short-term factors, with the supply of new properties coming on to the market still severely restricted."

Property data company Hometrack said estate agents and surveyors reported a 0.2 percent rise in house prices this month, but one that was very much concentrated in London and southeast England and unlikely to accelerate in 2010.

(Editing by Toby Chopra and Andy Bruce)