Mortgage lending rose at its slowest pace in three years as consumer credit increased less than expected last month in a sign that the urge to borrow is cooling.
Net mortgage lending - which takes into account new lending and repayments - increased by £6.5bn in July. This was the lowest increase since June 2002 and well below the average of £7.3bn in the previous six months.
However, the number of new mortgage approvals, which have been agreed but not yet paid out, hit a year-high in July, suggesting that activity in the housing market is set to recover.
Analysts thought the weakness in lending figures was unlikely to worry the Bank of England's monetary policy committee. George Buckley at Deutsche Bank said: "Net mortgage lending tells us more about where the housing market has been over the last quarter than where it is going over the next."
He warned against interpreting the modest gain in mortgage approvals from 96,000 in July to 97,000 as pointing to strongly rising house prices.
"These data must be considered against the backdrop of the surge in prices we have seen over recent years," he said. "With prices continuing to look overvalued relative to market fundamentals, we believe that in the medium term the outlook is for flat-to-falling prices.".
The Bank also released data showing net consumer credit, which contains debt not secured against dwellings such as private loans and credit card borrowings, had increased by £1.2bn, also below the average of £1.7bn in the past six months.
The weaker than expected data highlighted the vulnerability of the economy, which grew at its slowest annual pace for 12 years in the second quarter because of a sharp slowdown in household spending.
Alan Castle at Lehman Brothers warned that the figures pointed to sluggish retail sales in August. A survey by the CBI employers' organisation yesterday found that for the first time in seven years, more retailers were despondent about the future than hopeful. The pound dropped to a three-week low against the dollar.
Members of the MPC who supported this month's cut in interest rates to 4.5 per cent argued that high levels of household debt "accounted for some of the unexpectedly sharp slowdown in consumer spending". Those resisting lower rates said the "money and credit data had not pointed to a marked further softening in activity".
Ross Walker at Royal Bank of Scotland said: "This is something of a Catch-22 for policymakers: high debt levels constrain spending and necessitate lower base rates, but lower base rates encourage further debt accumulation."
