Non-mortgage lending underpins sharp jump in consumer credit

Private-sector borrowing surged in May, according to the latest credit numbers from the Central Bank.

The figures show that the annual growth rate of non-mortgage credit "jumped sharply" to 18.9 per cent from 16.1 per cent in April.

Consumer and non-financial business borrowing accounted for almost all of this increase, which is much more substantial than usual.

The value of term/revolving loans, which include facilities such as car loans, rose by slightly more than €2 billion over the month to €64 billion.

The increase came as mortgage borrowing also reached a new high, with the volume of outstanding loans growing by a record 27.5 per cent in the year to May.

Non-mortgage lending was, however, the main driver behind a sharp rise in private-sector credit as a whole, which stood at a robust €175 billion at the end of May.

This compares to €147 billion at the same stage of 2003, leading to an annual growth rate of 23 per cent when the figures are adjusted for factors such as exchange-rate movements.

This was almost two full percentage points higher than the annual growth recorded in April.

The Central Bank said banks and building societies had advanced a total of €3.7 billion in new loans over the course of May alone.

The bank was cautious on drawing clear conclusions from the annual increase in borrowing, however, noting that it was partly skewed by a low level of lending in the same month of 2003.

A breakdown of the credit numbers shows that Irish homeowners drew down almost €1.3 billion in new mortgages last month, bringing the value of outstanding mortgages to €60.5 billion.

This means that mortgage lending has been growing by about €1 billion each month for almost a year, fuelling fears that more vulnerable homeowners could be over-extending their financial capabilities.

This buoyant demand for mortgages has occurred as house prices across the country have surged against a backdrop of low interest rates.

Analysts believe euro-zone rates, which also influence the cost of other loans, will begin to rise from their current all-time low of 2 per cent over the next six months or so, possibly rising to 3 per cent in 2005.

A move upward in interest rates has already begun in the UK and the US, with the Federal Reserve marking its return to tighter rates last night.

The European Central Bank's governing council is not expected to make a movement on rates when it meets later today however.