Borrowing heading towards record €300bn

Consumers and businesses are heading towards record borrowing of €300 billion, according to the latest figures from the Central Bank. Private sector credit figures issued yesterday show new borrowings amounted to €4.9 billion in July, bringing total lending to €293.4 billion.

The figures show no real evidence that rising interest rates are helping to ease borrowing growth, although economists say this may still come later in the year. The Central Bank said the €300 billion level could be breached by this month.

There were strong signals yesterday that interest rates could rise further next month, having already seen four quarter-point increases this year. Another increase of this magnitude would leave rates at 3.25 per cent, lifting average mortgage repayments by about €35.

European Central Bank president Jean-Claude Trichet prepared the markets for another rise on October 5th by warning of inflation risks and saying there was a need for "strong vigilance".

The July borrowing figures mean that private-sector credit is now showing annual growth of 29.2 per cent, marking a slight decline on the 30.3 per cent recorded in June.

The Central Bank said the July rise would have been larger had it included an increase in securitised mortgages.

These securitisations involve lenders removing loans from their books and are thus not included in the Central Bank's overall figures.

When securitisations are included, however, the numbers show residential mortgages grew by €2.4 billion in July, the highest monthly increase so far this year.

This lifted households' total mortgage borrowing to €113.2 billion, with the increase coming as house prices climbed by 15.4 per cent year on year. Annual mortgage growth rose to 29.3 per cent from 29.1 per cent .

Mr Trichet declined to comment directly on Irish housing yesterday, but did acknowledge that markets were "abnormal" in some countries. He also noted that national regulators should look at circumstances in their own markets.

Austin Hughes, chief economist at IIB Bank, said the bank's figures implied a "bumper summer" for the Irish property market.

"Viewed from an ECB perspective there may be a concern that numbers such as these indicate money is still too cheap," he said.

A further breakdown of the Irish private sector numbers for July shows credit card debt remained fairly steady over the month, with customers appearing to pay their bills as they spent.

The annual growth rate in credit card borrowing, which has been steadily rising all year, fell from 18 per cent in June to 17.1 per cent.

The Central Bank noted, however, that it was traditional for credit card debt to post either a steady or a lower annual rate of expansion over the summer.

Overdrafts expanded by €222 million while short-term loans grew by €187 million. Alan McQuaid, chief economist at Bloxham Stockbrokers, said that while anecdotal evidence pointed to some impact from rising interest rates, official figures still demonstrated "soaring demand" for debt.

"There is no doubt that the SSIA funds will act as a buffer against higher interest rates in the coming months, with the monthly contributions simply being diverted to cover increased mortgage repayments," he said.

Mr McQuaid expects credit growth to ease as the year progresses, but says it will still be "very high" by euro zone standards even then.