Bank of England's Carney: curbing consumer lending would be 'big call'

LONDON (Reuters) - Bank of England Governor Mark Carney said it would be a “big call” for the central bank to rein in rapid growth in consumer lending, which picked up strongly last year and brought some echoes of the period before the global financial crisis.

Bank of England Governor Mark Carney delivers the Liverpool John Moores University's Roscoe Lecture, at the BT Convention Centre in Liverpool, Britain December 5, 2016. REUTERS/Peter Byrne/Pool

British consumer borrowing increased at the fastest annual rate for more than 11 years in November, the BoE said last week, and Carney told lawmakers that the momentum appeared to have continued into the Christmas holiday season.

Asked about measures of debt stress on households, Carney said there were signs the situation was under control, but that the BoE’s Financial Policy Committee (FPC) would watch out for problems in the event of an economic slowdown.

“What we as a committee will have to think about, and it is a big call, is whether there is anything that should be done, above and beyond making sure the core of the system is resilient to this,” he said. “It is a big step to go beyond that.”

Economists are watching to see if the pace of lending is maintained this year or slows as Britain kicks off the process of leaving the European Union and inflation picks up after a post-Brexit vote slump in the value of the pound.

Growth in 2016 relied heavily on consumer spending, which was partly funded by households borrowing more and saving less.

Alex Brazier, a BoE executive and FPC member, said the bank would be vigilant about a broader loosening of credit conditions beyond the car finance market which was in its sights last year.

Another FPC member, Martin Taylor, said consumer credit growth was a “flashing light” for the committee which needed to understand the situation better, but not necessarily a problem.

Consumer credit is only a small part of total lending to households, which BoE figures show is growing by 4 percent a year, compared with nearly 11 percent for consumer borrowing, and Brazier said the BoE could afford a considered approach.

As a share of economic output, household debt remains well below levels seen before the 2007-09 financial crisis.

The FPC lacks specific tools to target consumer borrowing, but one option would be to make banks hold more capital to penalize risky lending in general.

It will review in the summer whether to ask banks to begin increasing the amount of capital they hold against cyclical upturns in the credit cycle.

This buffer was reduced to zero after Britain’s vote to leave the EU rattled markets, and Brazier said it could stay there some time unless risks diminished.

Additional reporting by Alistair Smout; Editing by Louise Ireland