Banks say borrowing on plastic will be lowest since 2007, with mortgages down to 2010 level

Borrowing on credit cards is expected to plunge to the lowest levels since 2007 in the three months before Brexit, according to the Bank of England, in another indication of stresses facing the UK economy.

According to the latest quarterly health check on credit conditions from Threadneedle Street, high street banks forecast borrowing on plastic will decline in the first quarter by the most since records began 12 years ago.

It comes amid growing concern over consumer spending on the high street after the worst Christmas for retailers since the financial crisis, setting the economy up for a weak first quarter.

The Bank said its measure of demand for credit card lending over the three months to the end of March dropped to -20.7 from -7.2.

Its gauge for mortgage lending also dropped to -17.5 in the final quarter of 2018, from -0.2 in the third quarter, its lowest level since the end of 2010. The survey also points to a slight fall in demand over the next three months.

The looming threat of a no-deal Brexit in less than 80 days dragged down the UK property market further in December, according to a report from Britain’s top surveyors, with prices falling at the fastest rate in six years and the outlook for sales the weakest in two decades.

Economists said that the drop in mortgage lending likely reflected banks reining in their lending in response to the risk of a no-deal Brexit, with Threadneedle Street warning that prices could drop by almost a third.

Despite the warnings, prices have continued to rise sharply in some parts of the UK, including Manchester and Birmingham, even as the value of homes in London stalls or declines.

Most barometers of housing market activity have suggested national price growth is at the lowest levels in several years amid Brexit uncertainty. Still, the latest snapshot from Halifax, Britain’s biggest mortgage lender, said prices had risen sharply in December.

Economists, however, said that delays in the Brexit process – now increasingly likely after Theresa May’s Commons defeat this week – could extend the period of uncertainty until at least the middle of the year, acting as a drag on house price inflation.

While the sharp drop in demand for credit cards will sound alarm bells for the British economy, as it could indicate a likely drop in spending among consumers, it comes as a sign that households are cutting their borrowing after a rapid rise in debt levels over the past few years.

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Borrowing on credit cards, personal loans and car finance has risen above £200bn to surpass the levels seen before the financial crisis, with analysts blaming the increase on weak pay growth in the past decade, government austerity and cuts to benefits.

The precarious position of household finances meant families spent about £900 more on average than they had received in income during 2017, pushing their finances into deficit for the first time since the credit boom of the 1980s.

Howard Archer, the chief economic adviser to the forecasting group EY Item Club, said: “While the Bank has been keen to see the rate of consumer borrowing slowing, it will not want to see unsecured lending dry up as it will weigh down on economic activity.”