UK Households and Businesses Bank Deposits Continue to Increase
The Bank of England just published the Money and Credit report for the United Kingdom for May 2020. As usual, the monthly report focuses on three main pillars – broad money credit, lending to individuals, and lending to businesses.
The aim of the report is to help policymakers understand trends in the economy, but also developments in the banking system. The biggest surprise this month was the continued increase of deposits in banks by both households and businesses.
It reflects the sharp rise in broad money, but also the reluctance of businesses and households to invest or spend during times of the coronavirus pandemic.
Borrowing and Spending Trends in the United Kingdom
Last month UK corporates borrowed almost eight billion pounds from banks but also raised another three billion from financial markets. Sterling money held by households and non-financial businesses rose again in May, following sharp increases in March and April. It rose by fifty-two billion pounds, as people are hoarding money as a form of protection for the uncertainty ahead.
Households went even further. They repaid more loans from banks than they took out, affecting the bottom line of players in the banking industry and showing the unwillingness to take unnecessary risks such as buying on credit. Consumption, once again, suffered. Even mortgages for house purchase fell, with only 9300 mortgages sold by banks in May.
COVID-19 is weighing on consumer spending. Instead of spending, consumers preferred to pay back their credit cards and other forms of consumer credit.
This goes against what policymakers hope to achieve by providing credit facilities and grants to businesses and the consumers.
However when households received extra-funds in terms of cheap loans or any other form of subsidy, they chose to take some risk off the table and cover the open credit lines. This is normal, conservatory behavior explained by the way consumers act during economic recessions.
Moving forward, it is important to see what happens next. As credit cards and other loans are being repaid, what will consumers choose to do with the cash surplus – hoarding or spending? If the latter, how much of it?
The central bank did lower the conditions for new credit, as the cost of such a credit fell by over 5% since the start of the year. Hence, the Bank of England created all the facilities needed to make it easier for consumers and businesses to access credit.
The question is – will they?