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UK households saving more and borrowing less, figures suggest | UK cost of living crisis

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Households are saving more, limiting their credit card purchases and taking out fewer mortgages as they take a safety-first approach to Britain’s worsening economy.

Adding to fears of recession and a period of falling house prices, figures from the Bank of England showed weaker demand for all forms of borrowing and consumers more than doubling the amount put into bank accounts in September.

Consumers tend to cut back on spending when times are hard and according to the latest Threadneedle Street money and credit data, the amount saved rose from £3.2bn in August to £8.1bn in September.

Meanwhile, the number of new mortgage approvals dropped from 74,422 in August to 66,789 in September as higher inflation and the rising cost of home loans led to a more cautious mood among potential property buyers.

The average new mortgage rate rose by 0.29 percentage points to 2.84% in September but increased more sharply in October in response to the financial turmoil prompted by Kwasi Kwarteng’s mini-budget.

Ashley Webb, UK analyst at Capital Economics, said mortgage rates were likely to be above 5% throughout 2023. ”That’s why we think house prices will fall by around 12%”, he said.

Consumer credit increased by £700m in September, down from £1.2bn in August and below the £1bn expected by the City. Webb said people were becoming more cautious as the economic situation deteriorated.

“It may mean households don’t draw down their savings to support spending by as much as we expect, which is an extra downside risk to our forecast that the economy is already heading for a recession.”

Despite the weakness of the economy, the Bank of England is poised to respond to the UK’s current 10.1% annual inflation rate by raising official borrowing costs on Thursday. The consensus in the financial markets is for a 0.75 point increase to 3%.

UK inflation will be kept lower than previously forecast by the government energy price cap, the Office for National Statistics (ONS) said on Monday.

Annual inflation, which surged in response to a quadrupling of gas and electricity prices last year, will most probably peak at about 11% before falling back next year. It was previously on course to reach 15-16% without the government’s intervention, according to many forecasts.

Figures from the eurozone showed the annual increase in the cost of living for the 19 countries using the single currency rose from 9.9% to a record 10.7% in October.

The European Central Bank raised borrowing costs from 1.25% to 2% last week and the worse-than-expected inflation figures were expected to prompt further tightening in the future.

Bert Colijn, senior eurozone economist at ING bank, said: “The inflation rate jumped once again in October, to a whopping 10.7%. This was partly on higher consumer energy prices.

“The low prices on the wholesale market in recent weeks are clearly not yet translating into declining prices for households. In fact, it’s likely that this will only happen in a few months’ time and even that is a big ‘if’ because it depends on uncertain factors such as energy supply and the weather of course.”

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