pounds 1.1bn jump in consumer borrowing fuels boom fears

The need to put the brakes on consumer spending was highlighted by figures yesterday showing a pounds 1.1bn jump in consumer borrowing in May, close to the all-time record set in February. Its annual growth rate has picked up to 17 per cent.

Separate figures showed a 1 per cent increase in M0, the narrow measure of the money supply, in June, taking its annual growth up to 6.3 per cent.

The rise in consumer borrowing comes as several leading economists claim that the Chancellor of the Exchequer can halt the consumer boom by abolishing mortgage interest tax relief (Miras) in tomorrow's Budget.

The economists from the National Institute of Economic and Social Research and from consultancy London Economics said the abolition of Miras would reduce consumer spending sharply. However, they warned the revenue gain would be much lower than the direct cost of the relief, of just under pounds 3bn a year, because of reduced spending.

The expectation is that whatever Gordon Brown decides, interest rates will need to be increased. This expectation helped the pound stay at a five-year high yesterday, with the trade weighted index rising from 101.8 to 102.1 and the pound finishing the day at just over DM2.90.

The main component of M0, cash in circulation, expanded by 0.8 per cent during June. This was the biggest monthly rise for a year, when football fans visiting for the Euro 96 competition boosted the demand for cash.

Although high street spending does not follow the path of cash exactly from month to month, the surge pointed to a further increase in retail sales.

There was wide agreement among economists that these latest figures were alarming. "This adds to fears that consumer demand growth is accelerating as a result of the building societies' and insurance companies' windfall payouts," said Simon Briscoe at Nikko Europe.

Yesterday's figures follow a rash of news indicating that the economy is well on its way to a boom. Most striking were last week's big upward revisions to earlier figures for gross domestic product suggesting that there is less spare capacity in the economy than previously estimated.

Sean Shepley, an economist at investment bank Credit Suisse First Boston, said: "These figures are in line with all the other indications about growth. The pound might make it harder for the Bank to raise rates aggressively during the next six months, but they will have to climb."

Marian Bell at the Royal Bank of Scotland said: "It would be sensible to hold off in July to see whether the latest month's figures are a one- off or the start of a more lasting trend." But she predicted that base rates would be above 7 per cent by next spring.

Separately, an increase in stamp duty, now widely expected as part of the Budget package tomorrow, could trigger a big fall in house prices, according to research conducted for a hastily assembled housing and construction industry lobby group.

The group, Stamp Duty Concern, predicts that house prices could fall by up to 5 per cent for every percentage point increase in stamp duty. Although their estimate does not take account of any potential increase in the threshold for the duty, the authors say raising stamp duty will affect the housing market substantially without raising much extra revenue for the Treasury.