Does the cost of living crisis explain the leap in borrowing?

This chart, from the Bank of England’s latest release on money and credit, has piqued our interest:

The chart, published Tuesday, shows net consumer borrowing is now back at the level in the halcyon days of February 2020. Somewhat surprising given what’s happening geopolitically right? People certainly aren’t saving for a hard rainy day.

If we close in on credit card borrowing, the figures are truly remarkable. The leap in net borrowing is the highest since the BoE began recording the data in the early 1990s.

While this rise in the use of credit cards might be good for banks and the likes of Visa and Mastercard, one does wonder if its the same for the people of the UK. Borrowing with plastic seldom comes cheap. And we fear the surge could be down to the cost of living crisis here — and, indeed, that we could see a similar trend in the eurozone and the US too.

However, some economists are more optimistic. Capital Economics, for instance, puts the card craze down to consumer confidence. From a note by their chief UK economist Paul Dales:

Typically during periods when finances are tight households in aggregate pare back their demand for credit. Indeed, the £4.0bn rise in cash sitting in households’ bank accounts was smaller than the 2019 average rise of £4.3bn and suggests that households have stopped adding to their excess savings and have begun to reduce them. We estimate that the stock of excess savings fell from £161.8bn in January to £161.2bn in February. This suggests that households were confident enough to spend in February and/or were willing to use their savings to compensate for higher prices.

We hope he’s right and that the rush to plastic says more about faith in the economy than it does about the plight of vulnerable people turning to unsecured, high-cost borrowing to pay the bills.

With household energy bills set to soar in April, it’s worth keeping a close eye on the data in the months ahead.