Britons scramble for funds as credit crunch bites

By Matt Falloon and Raissa Kasolowsky

LONDON (Reuters) - Personal borrowing in Britain soared by its highest amount in more than five years in February, figures showed on Wednesday, as consumers rushed to raise what funds they can in the wake of the credit crisis.

But the Bank of England data also showed home mortgage approvals languishing near decade lows as banks toughen up their lending terms despite lower official interest rates.

The BoE said consumer credit rose nearly 2.4 billion pounds in February, up from a 0.9 billion pound rise in January and well over twice the amount analysts had expected.

Within that, banks' unsecured lending to consumers leaped by nearly 1.6 billion pounds, four times January's increase.

"Consumers are simply resorting to unsecured borrowing in their time of need," said Vicky Redwood, an economist at Capital Economics. "A similar pick-up in consumer credit was seen in the United States as its own slowdown gathered steam in the middle of 2007. Either way, a rise in unsecured borrowing out of desperation would hardly be a positive development."

Worries over what bad debt may be lurking on banks' balance sheets have driven up the rates at which banks lend money to each other, helping to raise the spectre of a global economic downturn.

Those costs are now being passed on to customers through higher retail banking rates, making re-mortgaging less attractive and forcing consumers to seek other forms of finance.

Indeed, housing equity withdrawal fell to around 7 billion pounds in the final three months of last year from almost 11 billion in the previous quarter, according to BoE figures.

DIVERGING RATES

The Bank of England is widely expected to cut official interest rates by 25 basis points to 5.0 percent either this month or in May but opinion is divided over how much further rates will fall this year.

The BoE is facing what Governor Mervyn King has dubbed the toughest challenge since it won independence to set interest rates in 1997. Policymakers face rising inflationary pressures while trying to gauge how sharply the economy might slow.

There has been little indication so far that lower official borrowing costs have eased the credit crunch caused by a lack of trust and confidence.

The BoE figures reinforced the view that Britain's housing market is cooling quickly.

Mortgage approvals for house purchase -- which can give an indication of house price inflation -- fell to 73,000 from 74,000 in January, to stand just above December's series low.

HSBC-owned bank First Direct has withdrawn mortgages for new customers because demand was too high for its relatively cheap rates and other lenders have cut back on mortgage offers.